Fitch: Banks Get By With A Little Help From Their Friends - The Default Rate Is Low In The Banking Sector But The Level Of Support Is High.

(From The Banker)

Banks in the developed world aren't on the endangered species list - yet. But a new study by Fitch Ratings of bank support in the developed world shows the extent of the efforts made to save them if they run into trouble.

The support provided hitherto by governments and institutional owners to banks that would otherwise have defaulted has serious implications for the way credit ratings are assigned and the analytical use that is made of the relative default frequencies of rated banks.

The Fitch study shows that, based on one-year average cumulative rates as the most statistically robust, banks are almost twice as likely to fail as corporates: 1.11% of banks fail on average versus 0.59% of corporates defaulting. But, only 0.10% of banks default over a one-year period, meaning corporates are almost six times more likely to default than banks (see table).

Default lines

This is despite an environment in which banking crises remain a perennial risk - indeed in Japan the crisis is still a pressing reality. On a one-year basis, banks are 11 times more likely to fail and be supported than they are to default.

Fitch defines bank failures as those instances in which the institution either defaults or is only kept going by one of the following means: state or insurance fund support; acquisition by some other corporate entity; or injection of new funds from shareholders or equivalent.