OREANDA-NEWS. Investors in EU bank bonds are uncertain about how the Bank Recovery and Resolution Directive (BRRD) will be applied, but are reassured by stronger, better capitalised banks, according to Fitch Ratings' latest investor survey. The survey was conducted from 7 January to 12 February 2016.

Fifty-nine percent of the 64 investors that responded to our survey said they were undecided about whether the net impact of resolution regimes and tighter regulation (including higher capital requirements) is favourable for bank creditors. Twenty-two percent considered the net effect positive because it means banks are stronger or it is easier to price their risks. But 19% consider the net effect unfavourable because sovereign support has reduced, and because it is not yet clear how the new framework will operate.

The survey results and recent market price turmoil illustrate that investors are still assessing the appropriate risk-pricing of bank equity and various forms of debt. We expect this to continue for the next couple of years, until the operation of the new supervisory and resolution frameworks becomes clearer.

Enabling the resolution of failed banks without need for sovereign funds is a cornerstone of the BRRD. We removed sovereign support from most EU banks in May 2015. This resulted in downgrades of 48 EU banks and their subsidiaries (see the link below for more detail on the rating rationale). The number of downgrades and their severity were reduced considerably by the banks' improving stand-alone strength, largely resulting from tighter regulation, notably Basel III.

EU bank capitalisation has improved substantially in recent years and is well above pre-crisis levels. The trend remains positive. The European Banking Authority's 3Q15 dashboard, published on 23 February 2016, shows a clear improvement in capital adequacy ratios reported by 154 banks participating in its study. Seventy-three percent of banks reported common equity Tier 1 ratios of 11%-14% at end-September 2015, a sharp improvement on 39% at end-2014.

The BRRD has been operational since January 2015 but its bail-in tool only became mandatory throughout the EU at the beginning of 2016. Outside the eurozone, national resolution authorities are responsible for resolving failed banks, but the Single Resolution Board (SRB) will be the main decision-maker for Banking Union banks (essentially those in eurozone countries). The SRB's mission is to ensure orderly resolution of failing banks with minimum impact on the real economy and on public finances of the participating Member States. It has discretion in each case on how best to achieve its objectives, but private sector burden-sharing (including of senior investors) is an essential feature of the BRRD approach. A track record has yet to be established as the SRB only became fully operational on 1 January.

Our 1Q16 investor survey represents the views of managers of an estimated EUR8.0trn of fixed-income assets. We will publish the full results in early March.