Proposed reforms for the financial system should reduce the extent of risk-taking by the biggest U.S. banks and may bolster their ratings, Fitch Ratings said on Friday.
The debate is intensifying over legislation for the banking system designed to avert another global financial crisis. Although the final form of changes to the laws is uncertain, indications of the broad effects it may have on banks are becoming clearer, Fitch said.
In the near term, reforms are expected to reduce the risk profile of the industry and most particularly the risk profile of the largest U.S. banks, Fitch said in a special report on U.S. financial institutions. This would generally imply positive credit rating implications.
A bill crafted by Senator Christopher Dodd, chairman of the Senate Banking Committee, won approval at the committee level on Monday by a narrow vote. Dodd now must secure the backing of a handful of Republicans for proposals to overhaul the U.S. financial system.
The recasting of the regulatory framework has now taken center stage, Fitch said.
Current discussion of proposed reforms is the most substantive phase in the response to a crisis, as it crystallizes more durable and potentially more far-reaching changes, Fitch added.
The Dodd bill includes new rules to maintain the stability of the financial system, regulate debt instruments that have been blamed for contributing to the credit crisis, and protect consumers from risky financial products.
The impact is likely to be greater for the largest institutions that are most active in the international capital markets, the Fitch report said.
However, the ultimate reach of such reforms remains to be seen.
And there may be some negative side-effects for banks from new regulations, the Fitch report cautioned.
Higher capital requirements may reduce equity investors' willingness to invest in the banking sector, Fitch said.
These proposals could also lead to more downward movement in issuer default ratings (IDR) and senior debt ratings of the system's largest banks if these firms were to encounter severe financial stress, Fitch said.
If regulation becomes more consistent, that could be an important change, Fitch said. But it's uncertain whether a regulator that was empowered to enforce reform over complex financial institutions would be created.
A powerful regulatory body could result from combining the Office of the Comptroller of the Currency and the Office of Thrift Supervision, or through the creation of an entirely new regulatory authority, Fitch said.
Fitch also said a new regulatory structure could come from modifying the supervisory role of the Federal Reserve to focus on the largest holding companies.
Many factors remain unknown, including which banks the government would be prepared to save from collapse.
There is clearly no assurance that the financial institutions that are considered critically important today will be deemed worth saving at some point in the future, the report said.
(Additional reporting by Karey Wutkowski in Washington)
(Reporting by John Parry and Walden Siew; Editing by Theodore d'Afflisio)