Regulatory reform the top concern for European investors: Fitch

Date: Thursday, May 20, 2010
Author: Investment Executive

Regulatory reform is the top concern for European investors when it comes to bank credit quality, says Fitch Ratings.

“Regulation remains a concern to investors, with 83% believing proposed changes represent critical or important risks to the credit quality of the bank sector,” says Monica Insoll, managing director in Fitch’s credit market research group.

This edged out macroeconomic risk, which is seen as a threat by 81% of respondents. Moreover, Fitch reports that investor sensitivity to both regulation and the economic outlook increased marginally from already-elevated levels.

“Lack of consensus on the appropriate regulatory responses to the financial crisis is in part due to lack of agreement about the fundamental causes of the crisis,” says Gerry Rawcliffe, group credit officer for financial institutions at Fitch Ratings. “The lack of clarity regarding the response is creating a high degree of uncertainty, which is never positive for financial markets.”

Fitch says that most progress has been made in micro-prudential regulation, primarily stricter capital requirements; tougher risk management requirements; new liquidity standards; and, the introduction of a leverage ratio. Progress on more macro-level issues is likely to be slower, it says, as the ramifications are greater.

A particularly significant development will be in the reforms to resolution regimes, which were largely found wanting in the face of the crisis, Fitch notes; as this may ensure that certain bank creditors have to share the costs of bank failure, instead of taxpayers. “Such changes could have potentially serious implications for bank investors across the capital and funding structure,” it says.