Banks worldwide face an increasingly challenging operating environment. says Fitch Ratings says in its semi-annual report on systemic banking risk.

Bank systemic risk continues to rise, the U.S. and Swiss banking systems have weakened due to the U.S. subprime crisis, and a sharp fall in global credit growth is underway, it reports. “Large, global banks in several major developed countries have been hardest hit by the U.S. subprime crisis, marking this crisis out from more familiar, country-specific banking crises,” says Richard Fox, senior director in Fitch’s sovereign team. “The U.S. and Swiss banking systems have been toppled from their top, ‘very strong’ ranking based on Fitch’s Banking System Indicator. But this still leaves them on a par with most developed country banking systems which remain ‘strong’.”

“In the United States, losses and writedowns to date, while still mounting, fall well short of aggregate system capital — a conventional measure of the severity of a banking crisis. But global real credit growth is forecast to slow sharply to 9% this year, from over 14% last year, and leading indicators of potential stress are flashing in more emerging market regions,” Fox adds.

The fall in the U.S. Banking System Indicator reflects individual rating downgrades for over 30 banks and bank groups since October, the rating agency explains.

“Fitch expects ratings pressure to remain for the remainder of 2008, but a further decline in the BSI is not envisioned,” says James Moss, managing director of Fitch’s North American Financial Institutions team. “The largest U.S.banks have raised in excess of US$60 billion in new capital to date, often in amounts representing 10% or more of a firm’s capital base.”

Four developed countries are in Fitch’s highest macro prudential risk category, including Canada. The others are Australia, Ireland and Iceland. Fitch says the trends exhibited in Canada, Australia and Ireland are nowhere near as extreme as in Iceland.

Australia remains one of now only five ‘very strong’ banking systems (Luxembourg, the Netherlands, Spain and the United Kingdom are the others). With the UK’s Northern Rock an isolated bank failure, none of these countries have seen any large bank’s individual rating downgraded, Fitch notes. In the UK and Spain, weakening property sectors are likely to exert some moderate pressure on banks, while in the UK, the potential for additional write-downs and a weaker earnings outlook for wholesale and investment banking will impact banks more exposed to those sectors.

Developed countries in aggregate have more elevated macro prudential indicators than emerging markets, it notes. http://www.fitchratings.com