Fitch: US Banks De-Guaranteeing: No Immediate Rating Impact

NEW YORK--(BUSINESS WIRE)--

Any removal of the existing guarantees between the U.S.-domiciled global trading and universal bank (GTUB) parents and their overseas subsidiaries that house over the counter (OTC) derivative (or swap) dealers will not immediately affect the ratings of these foreign subsidiaries, according to Fitch Ratings.

Under Fitch's rating criteria, ratings assigned to financial institution subsidiaries deemed to be "core" to parent banks' overall operations are typically equalized with the parents' issuer default ratings (IDRs). In the cases of the five U.S. GTUBs, our assessments that their subsidiaries are core to their respective parents generally hold regardless of the existence of (or reliance on) any parental guarantees, because many factors, such as operational integration, reputation, branding and ownership, among others, support these core designations.

With regard to how counterparties of bank subsidiaries may be affected by the removal of transaction-level guarantees, Fitch recognizes that such removals are not without potential credit implications. However, without visibility on the contract-level terms in an individual swap counterparty's arrangements, Fitch cannot estimate such potential implications.

Fitch sees the risk of higher U.S. regulatory scrutiny in reaction to guarantee removals as difficult to gauge but recognizes broad market perceptions that some inconsistencies exist on the various qualifying conditions U.S. regulators define as exempting certain foreign counterparties and foreign swap trades from U.S. rules.

Fitch sees one reason for removing subsidiary guarantees is to respond to concerns by foreign swap counterparties that the removals may permit the avoidance of their swap trades being executed on a U.S. swap execution facility (SEF) and centrally cleared, which would bring the trades under the U.S.'s rules and reporting regime. In our view, this may provide some short-term reprieve to non-U.S. counterparties, but the swap clearing rules being put in place in Europe are expected to be similarly challenging for them. It is not fully clear whether the removal of parent subguarantees would even achieve avoidance for non-centrally cleared swaps, which comprise the vast bulk of the OTC market.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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