Emerging markets bank support robust despite resolution regimes: Fitch

Government support for banks in emerging markets is unlikely to weaken materially despite greater adoption of bank resolution regimes, Fitch Ratings has said

Government support for banks in emerging markets (EMs) is unlikely to weaken materially despite greater adoption of bank resolution regimes, Fitch Ratings has said.

The impact of resolution regimes on government support will depend on policy stances by authorities, framework specifics and the extent of banks' loss-absorbing debt buffers for potential bail-ins. Fitch said it expects several factors to drive the development of resolution regimes in EMs.

They include efforts by international institutions like the Financial Stability Board and IMF to incentivise adoption; the desire to catch up with perceived best practice in developed markets; and the need to reduce the burden on governments supporting failing banks, particularly given increased debt and deficits due to the pandemic.

In many EMs, however, Fitch said state support will be available for banks even after the introduction of bail-in legislation. The authorities' policy stances and intentions will be the key. Where legislation is driven by external commitments, the authorities may seek to continue supporting banks despite the framework adopted.

For example, Saudi Arabia and the UAE are introducing bail-in legislation but Fitch still factors a high probability of state support into bank ratings as the authorities will prefer to support domestic banks given the systemic risk of allowing banks to default.

Framework specifics are also important. Legislation that requires -- rather than merely permits -- mandatory bail-ins of senior creditors in a bank resolution is a much stronger indicator that senior creditors will bear losses rather than benefit from state support.

South Africa plans to enact a resolution framework with a new class of bail-in eligible senior securities which once implemented is likely to lead us to lower banks' support rating floors (SRFs) to no floor.

Bank funding structures and creditor hierarchies are also important. Authorities are less likely to bail in senior creditors if banks are predominantly deposit-funded and deposits are ranked equally with senior debt, as it is politically more acceptable to bail in institutional debt investors, especially foreign ones.

Defaults by Kazakh banks in 2009 and 2012, as well as by Ukraine's Privatbank in 2016 and International Bank of Azerbaijan in 2017, were made possible by the significant volumes of institutional debt on their balance sheets.

These cases also show that the authorities' stances on creditor bail-ins can be more important than the specifics of any resolution legislation in place. SRFs in each of these markets are low following the defaults.

EMs have generally been slower than developed markets to introduce resolution frameworks, partly because they were less affected by bank failures in the global financial crisis. This also reflects generally less developed creditor and regulatory frameworks, and the considerable freedom their authorities have to resolve failed banks, even without bail-in legislation.

State support has also been the norm in many EMs where some of the largest banks are owned by or closely tied to the state, sometimes with policy roles (for example Brazil, China, India, Russia, Turkey).