Single resolution mechanism a positive for sovereign credit says Fitch

Ratings agency Fitch has said that the European Commission’s proposal for a single resolution mechanism (SRM) to wind down struggling banks would be a good thing for sovereign credit, as it would reduce the costs to a single sovereign of bank failure (release).

A single resolution board making “objective and balanced” decisions, it says, could reduce uncertainty. An efficient process, meanwhile, could reduce total costs so that the burden can be shared between shareholders, bondholders and, if necessary, a resolution fund supplied by eurozone banks. This resolution fund would benefit from pooled resources, and thus, lower risk than smaller national funds.

It does note that the mechanism could become more complex if the bank being resolved involves subsidiaries or parent companies outside of the banking union. In addition, a resolution fund is unlikely to be large enough to cope with another systemic crisis in European banks.

We view progress towards banking union as positive for investor confidence in eurozone sovereigns, Europe's banking sector and the vast majority of banks. The SRM is the second and probably final pillar of the union now that some form of depositor preference will be built into the final BRRD [Bank Recovery and Resolution Directive]. The first pillar, the single supervisory mechanism (SSM) centred on the ECB, should enhance consistency and comparability of risk measurement and reporting.

The Germans are unlikely to be happy with this development.