TEXT-Fitch says ring-fencing could widen ratings gap within bank groups

(The following statement was released by the rating agency)

Oct 10 - Ring-fencing the investment banking or retail banking operations ofmajor European banks could lead to greater ratings differentiation between legalentities in the same banking group, Fitch Ratings says.

While approaches may differ, we think the overall effect would be broadlysimilar, creating safer retail banking units with more stable and possiblyhigher credit ratings through economic and market cycles. The UK has alreadybegun steps to ring-fence banks' retail arms, while proposals from a EuropeanCommission expert group led by Erkki Liikanen recommend putting up a similarbarrier around certain securities trading activities of major universal banks.

The credit profile of the retail arms would be supported by deposit funding andrelatively low-risk secured lending. But the credit profiles of parts of abanking group that engage in certain securities trading and investment bankingmay weaken as they lose funding benefits from retail operations, and because oftheir fundamentally more volatile earnings and risk profiles.

The extent to which ring-fencing would widen the gap between ratings in the samebank group would depend on its effectiveness at separating the funding andcapital of the different businesses, and the detail of what activities will beallowed to form part of a retail banking operation.

It is too early to say how big an impact on ratings ring-fencing would have.Also, these changes would come alongside other major regulatory reforms. Inparticular, the broader move to reduce the need for future bailouts is likely toreduce the amount of state support we factor into Issuer Default Ratings, whilerising capital and liquidity requirements should strengthen banks' creditprofiles, benefiting their Viability Ratings.

Although the UK and European ring-fencing models have similar intentions, thereis a risk that UK banks would have to ring-fence more than one part of theirbusiness if law-makers did not find some common ground. However, the Europeanproposal is only at an early stage and could still change significantly if it istaken forward.

(Caryn Trokie, New York Ratings Unit)

((Caryn.Trokie@thomsonreuters.com; 646-223-6318; Reuters Messaging:rm://caryn.trokie.reuters.com@reuters.net))