Fitch expects the Financial Stability Board to coordinate with the Basel Committee for Banking Supervision on “a review and reverts with learning points” in order not to let crisis to go to waste. The credit ratings agency relayed some interesting notes of a speech from the chairman of the BCBS speaking in his personal capacity. Fitch reported that “he suggested that supervisory memories may have faded” and he highlighted “the risks of watered-down regulatory proposals.” The chairman also reported that the scope regarding the application of Basel rules remains at the discretion of the national supervisory authority “to interpret what that meant at each jurisdiction level, which then leads to uneven application of the Basel rules”, a vague allusion to the outcome at Credit Suisse.

Fitch understands that the BCBS “plans to revisit the 2016 Interest Rate Risks on the Banking Book (IRRBB) shock scenarios as part of the 2023-24 workplan.” The IRRBB refers to the current or prospective risk to the bank’s capital and earnings arising from adverse movements in interest rates that affect the bank’s banking book positions. The failure to manage adequately the IRRBB is understood to be at the source of the failure of Silicon Valley Bank.

Observing societal trends, the Fitch analysts stated: “the impact of social media and the use of digital smartphone apps to rapidly move funds between banks could have influenced the SVB’s run on deposits.” This in turn could “inform the boss with his existing workplan, agenda item on the digitalisation of finance, together with looking at the implications of digitalisation for banks.”

More fear than harm outside Credit Suisse AT1 holders

The Fitch analysts said that they took comfort that “the regulators from major development jurisdictions rushed out remarkable statements saying they wouldn’t do what the Swiss polity did” and that “they would more or less follow the creditor hierarchy in the last waterfall.” Fitch concludes that no change to the rules should be expected in the “near term.”

Attempting to explain the reasons why the resolution process was not applied to Credit Suisse, Fitch noted in the last published Swiss Financial Market Supervisory Authority (Finma) resolution plan published last year for Credit Suisse, that “there was still quite few issues that needed attention in terms of operationalising the resolution playbook.” This and the need to avert contagion risks were in Fitch’s view “the most likely reasons why resolution tools were not applied.”

Stress test season

Fitch expects the US banks to report its stress test results in June 2023 whereas the EU banks will report by the end of July. Fitch billed the EU stress test scenarios “as the toughest yet in a bid to close their credibility gap with the US stress tests.” The agency points to higher “interest and inflation components that will more readily impact the fair value of banks liquidity asset holdings that may come through as additional shocks to the capital base based on previous stresses scenarios.” These shocks will provide policy guidance should higher capital requirements are necessary.

EU-proposed reform of bank crisis management and deposit insurance framework

Fitch noted that the proposal aims at making deposits preferred by moving them up above the senior obligation stack in insolvency hierarchies and “this makes it less troublesome to bail-in other senior obligations, including preferred senior debt and uncollateralised derivatives, without basing contagion fears on accounts of uncovered corporate and institutional deposits.”

Secondly, the Fitch analysts said: “all deposits were made pari-passu, meaning that retail SME and other uncovered institution deposits will be rated equally as these retail deposits.” It is important to underline that the European Commission proposes to maintain the level of protection at €100,000 per depositor and bank, as well as to cover public entities such as hospitals, schools and municipalities.

Finally, the Fitch analysts observed that “the creditors for large systemic banks will still have to swallow losses”, whereas the “senior creditors to the smaller banks can still avoid bailouts if taxpayer funded rescues take place.” They continued: “this unevenness regarding the lack of senior burden sharing for smaller banks putting through national insolvency regimes will still remain in place.” Delano understands that the European Commission is reviewing the possibility to expose the creditors of smaller banks to the same burden sharing rules for larger banks as set in the Bank Recovery and Resolution Directive.