Fitch: EU too big to fail rules will erode bank credit ratings

EU PROPOSALS to avoid bank bailouts in future are already feeding through into credit calculations, prompting ratings agency Fitch to announce yesterday that they will “weaken state support in the long term”.

That is likely to mean a round of credit downgrades for European banks and an increase in the cost of their debt.

On Wednesday, the European Commission unveiled new rules that aim to wind up failed banks rather than bail them out at huge cost to taxpayers.

Fitch said that implementing them will be a “huge challenge” but that “the proposals will ultimately result in us factoring less support into EU bank ratings in the coming years”.

The aim of the new regulations is to remove the “implicit subsidy” whereby banks’ debt costs less than their risk-taking merits because markets assume creditors will be bailed out if they fail. They will force huge banks to draw up “living wills” on how to dismantle themselves without destroying the financial system.