Regulatory Changes to Hit US Banks Hardest, Predicts Fitch

Regulatory changes to capital and liquidity requirements are likely to have the greatest effect on US banks as the recovery starts to unfold, predict ratings analysts at Fitch. “We ourselves have more questions than answers at this point,” admitted Christopher Wolfe, managing director of corporate finance at Fitch, speaking at the ratings agency’s event in London. “But one thing we think is going to change is that capital thresholds are going to be raised.” This will have a material impact on US banks’ operations.

The proposed – and hotly debated – stronger delineation between ‘traditional’ bank activities and market activities is also set to have a strong impact, although other changes were likely to come sooner. Wolfe also warned that holding higher levels of liquidity carries with it many risks. “Of course that sounds great and we should all be happy about it,” he said, “but there is a cost associated with carrying money that is not doing anything.”

However, recovery is still some way off, according to the ratings agency’s latest outlook on the US, Latin American and Asian banks. “The situation is not worse but there are no signs of improvement,” Wolfe said. “No-one knows [precisely] what the answer is.” Last year, 140 US banks failed, although around half of the failures were concentrated in the states of Georgia, Illinois, California and Florida.

Government support helped ensure that the strongest banks, such as Citigroup and Bank of America, have retained high long-term ratings, even when their individual ratings have dropped sharply. By contrast, Canadian banks’ outlooks remain stable, with no bank failures and stable domestic institutional funding sources and consumer deposit base.

A “big contrast” has emerged between emerging markets in central and eastern Europe (CEE) and those in Asia and Latin America. Particularly in the latter region, local economies have proved more resilient, while developing local capital markets have been able to provide funding alternatives for banks. Peter Shaw, managing director for Latin American Institutions at Fitch, said that certain countries’ recent performance stood out in this respect. “Brazil’s economy has improved much quicker than we expected,” he said. He added that even though the country was among the most exposed of the Latin American countries to foreign economies, the exposure was still very small. Mexico has also seen an improvement in margins as banks have begun to lend once more to the private sector, making for a more diversified loan mix. However, Shaw points to a “sluggish” economic outlook because of continuing low interest rates and limited potential balance sheet growth, which will threaten margins in future.

Australia led the Asia-Pacific region, with a successful turnaround following the initial shocks of the credit crisis. This can be attributed to a swift government response, as well as the strong effect of continued demands on its tourism and education markets from Asia.

“Non-performing loans [NPLs] did pick up sharply – but this was from a very low base,” said Peter Tebbutt, senior director, financial institutions, Asia at Fitch. Overall, Asia has been relatively unaffected by the crisis – with the exception of export-oriented countries such as Japan, Taiwan and Korea, which suffered the knock-on effect of the slowdown in demand for consumer goods in the West. “But,” Tebbutt added, “Korea has held up better than expected, as the government took rapid and decisive action in a number of areas when the crisis first hit.”

However, he warned of over-investment, in China, warning that, although China has seen a rise in gross domestic product (GDP), this would prove worthless if it was the result of overzealous government investment.


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