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European Banking Union Essential Step For Long-Term Confidence

Progress on European banking union is essential to achieving long-term confidence in the eurozone banking sector, Fitch Ratings says in a new report. The report also details which banking groups Fitch expects to be included and a country-by country analysis.

"Banking union is a building block for the long-term stability of the eurozone but it will take time," says Bridget Gandy, co-head of EMEA Financial Institutions at Fitch. "It should help level the playing field to create a sustainable platform for growth for divergent national economies. Ties between banks and their sovereigns will remain, but banking union should loosen them somewhat."

France is likely to be the largest banking system by assets under direct ECB supervision. French regional banks in the Credit Agricole, Groupe BPCE and Credit Mutuel groups are likely to be included because of their strong mutual support structures. Fitch expects Germany to have the largest number of banking groups regulated directly by the ECB, however this will comprise only 65-70% of German banking assets. Some 40% of Germany's retail sector is likely to remain under national supervision, comprising a multitude of local savings and cooperative banks.

Fitch does not anticipate any short-term impact on European banks' ratings from the introduction of banking union, but for the vast majority of European banks, progress towards banking union should eventually be positive for Viability Ratings (ratings excluding extraordinary support). If the ECB establishes itself as an authoritative supervisor, the comparability of banks' risk reporting should improve. Together with transparency around how and when a bank would be resolved, this should improve investor confidence, resulting in better access to the capital markets for banks and better pricing.

More efficient allocation of capital is broadly positive. However, Fitch sees longer term negative potential for some banks and their domestic borrowers in the stronger eurozone countries. A single supervisor may lead to the creation of more pan-eurozone banking networks, collecting deposits in one country and lending in another. This would be an important shift from locally funded operations and would mean that banks operating in deposit-rich countries would have to pay more to compete for funding, and would pass this cost on through their lending rates.

Link to Fitch Ratings' Report: European Banking Union’s Impact On Banks

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