Sustained high global credit growth is stretching an increasing number of developed country banking systems, including Canada’s, and remains a concern, says Fitch Ratings in a new report.

“Median real global credit growth was sustained at over 11% last year — its highest since the eve of the Asian crisis in 1997” says Richard Fox, senior director in Fitch’s Sovereign team. “This has raised vulnerability to potential bank systemic stress, as measured by Fitch’s Macro-Prudential Indicator.”

He adds that 70% of developed country banking systems now exhibit ‘moderate’ or ‘high’ vulnerability to potential stress compared to only half of emerging market systems. “However, developed country banking systems are also judged by Fitch as generally ‘strong’ and therefore in a better position to weather adverse shocks, while emerging market systems are, with some notable exceptions, typically ‘weak’ as measured by Fitch’s Banking System Indicator,” Fox adds.

Iceland remains in the highest risk category and continues to exhibit the most extreme indications of potential stress, Fitch said. Although an adjustment process is underway and lending growth has slowed, private sector credit still rose by more then 63% of GDP last year, it noted.

Credit-to-GDP has also continued to rise rapidly in Ireland, Spain and San Marino, but these countries are in the moderate risk category since real exchange rate and asset price trends do not exceed the trigger values Fitch uses to assess heightened risk levels.

By contrast, Australia and Canada do exhibit this combination of conditions – though to a much less extreme degree than Iceland, Fitch said, and move into the riskiest category. “Australia and Canada are examples of developed countries where the real exchange rate has been sufficiently above trend to trigger an [its riskiest] designation since 2004 and 2005 respectively. But the acceleration of credit growth has been more gradual, only rising more than 5% above trend in 2006,” it says, noting that credit growth has been more sudden in Canada, rising by over 13% of GDP in 2006.

“However, all six of these developed countries have ‘strong’ or, in Australia’s case, ‘very strong’ banking systems, as measured by Fitch’s Banking System Indicator. This measures intrinsic banking system quality or strength and needs to be judged alongside the MPI in gauging overall bank systemic risk. Strong banking systems – as found in almost all developed countries – are better able to deal with the potential stresses that Fitch’s macro-prudential analysis aims to identify,” it says.

A noteworthy change amongst updated Banking System Indicators is the strengthening in China’s banking system to BSI ‘D’, due to financial reforms, strengthened capitalisation, reduced non-performing loans and strong economic conditions. Half of all emerging market banking systems are to be found in this category, which nevertheless exhibits significant weaknesses compared to international peers.