World news – Constant support for banks in emerging markets despite settlement regulations: report


According to Fitch Ratings, government support for emerging market banks (EMs) is unlikely to wane significantly despite stronger implementation of bank resolution rules. The impact of resolution regimes on government support depends on the policy positions of the authorities, the framework and the extent of banks’ loss-absorbing debt buffers for potential bail-ins. Fitch expects several factors to drive the development of settlement systems in emerging markets. This includes efforts by international institutions such as the Financial Stability Board and the IMF to create incentives for adoption. the desire to catch up on perceived best practices in developed markets; and the need to ease the burden on governments that support failing banks, especially given the increased debt and deficits caused by the pandemic.

In many emerging markets, however, Fitch will say that government support for banks will continue after adoption the bail-in legislation will be available. The political positions and intentions of the authorities will be key. If the legislation is driven by external obligations, the authorities can try to continue to support the banks despite the framework passed.

For example, Saudi Arabia and the United Arab Emirates are introducing bail-in laws, but Fitch is following suit As before, a high probability of government support for bank ratings, as the authorities prefer the support of domestic banks given the systemic risk of causing banks to default.

Framework specifics are also important. The legislation that mandates, and not only allows, mandatory bail-ins from senior creditors in a bank decision is a much stronger indicator that senior creditors are suffering rather than benefiting from government support.

South Africa plans to include a resolution framework Adopt a new class of bail-in senior securities that, once implemented, will likely result in banks’ Support Rating Floors (SRFs) not being lowered to any floor.

Bank funding structures and creditor hierarchies are also important. Authorities are less likely to bail senior creditors when banks are predominantly deposit-funded and deposits rank pari passu with senior debt, as it is politically more acceptable to bail institutional borrowers, especially foreign ones.

The Failures of Kazakh banks in 2009 and 2012, as well as Private Bank of Ukraine in 2016 and International Bank of Azerbaijan in 2017 were made possible by the significant volume of institutional debt on their balance sheets. These cases also show that the authorities’ stance on bail-ins from creditors may be more important than the specifics of applicable resolution laws. The SRFs in each of these markets are low after the defaults.

EMs were generally slower than developed countries to adopt resolution frameworks, also because they were less affected by bank defaults 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 without bail-in legislation. Government support has also been the norm in many emerging markets, where some of the largest banks are state owned or closely linked to the state, sometimes with political roles (e.g. Brazil, China, India, Russia, Turkey).

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Continuous support for banks in emerging markets despite Settlement rules: Report
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