Overall bank systemic risk has declined over the past six months, but continued rapid credit growth in some countries could lead to renewed deterioration over the next six months, says Fitch Ratings.

In a special report issued today, Fitch says that strengthening in a number of banking systems has reduced systemic risk in the banking sector. “Bank systemic risk has eased marginally overall in the past six months” says Richard Fox, senior director in Fitch’s Sovereign team. “Twelve banking systems have seen appreciable strengthening and the number of countries in the highest risk categories has fallen to 40 from 45, out of a total of 81 systems monitored.”

Spain and Switzerland have moved into the highest category of the Fitch Banking System Indicator, which is a measure of intrinsic banking system quality or strength. Austria and Germany also move up a category to BSI ‘B’ denoting a strong/high quality banking system. Canada is currently in the B category too. Of developed country systems, 90% are now concentrated in these top two categories.

Fitch reports that Japan has also improved a notch to enter the BSI ‘C’ category. Emerging market banking systems have also strengthened. Those in the BSI ‘B’ category, which rank on a par with the typical developed country system, increase to nine, with the addition of Bahrain, Czech Republic, Mexico and Qatar, the rating agency says. In addition, Brazil, Latvia and Oman move up into the ‘C’ category. However, half of all emerging market banking systems remain ‘weak’ and a further 20% ‘very weak’.

Macro-prudential risk is indicated by excessive lending growth when accompanied by either strong asset price appreciation and/or real exchange rate strength and is often a precursor to systemic problems. Fitch measures these risks with its Macro-Prudential Indicator.

The MPI has increased slightly since February, it says. Five countries – Austria, Czech Republic, India, Slovakia and Slovenia – move up into the “moderate risk” (MPI 2) category. But Malta and Norway move into lower risk categories. No new countries move into the highest MPI 3 category, which now contains just five countries – Azerbaijan, Iceland, Ireland, Russia and South Africa. Canada is rated in the least risky category.

The number of countries in any of the highest risk categories – BSI D or E or MPI 3 – of Fitch’s Systemic Risk Matrix has fallen to 40, with Central and Eastern Europe and Latin America accounting for over half of them.

“Macro-prudential data suggests potentially increasing stress in a number of countries, which could result in them moving into higher MPI categories in six months time,” Fitch notes. “Romania and Ukraine, both with relatively weak (BSI D) banking systems, could move into the MPI 3 category. Ecuador, France, UAE and Venezuela could move into the MPI 2 category.” However, Fitch stresses that developments to date in 2006 provide only a partial indication of possible changes. All the series on which the MPI assessment is based are volatile and notoriously difficult to forecast, it adds.