Institutional bond investors are encouraged by regulators’ efforts to bolster European banks’ capital strength, according to a recent survey by Fitch ratings. But these investors
are uncertain about how the region’s new bank bailout regime, the Bank Recovery and Resolution Directive, which took effect in January, will be applied.

The study found that 59% of the 64 investors who responded to the survey were undecided about whether the net impact of resolution regimes and tighter regulation (including higher capital requirements) would be favourable for bank creditors. Another 22% said that they believe the net effect is positive “because it means banks are stronger or it is easier to price their risks.”

Nineteen per-cent said the net effect is negative because the prospect of government support for the banks has been reduced and how the new bailout regime will operate is unclear.

Fitch says that the results of the survey and recent market volatility demonstrate 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,” Fitch adds, “until the operation of the new supervisory and resolution frameworks becomes clearer.”

Last year, Fitch downgraded 48 European banks, citing the reduction in the prospect of government support under the new bailout regime. However, it says, the number and severity of downgrades “were reduced considerably by the banks’ improving stand-alone strength, largely resulting from tighter regulation, notably Basel III.”

This perception that banks have improved their capital strength is confirmed by the latest data from the European Banking Authority, Fitch states. The data show that 73% of banks reported common equity Tier 1 ratios of between 11% and 14% as of September 2015, up from the 39% of banks at that level at the end of 2014.

Fitch surveyed managers of an estimated €8.0 trillion in fixed-income assets between Jan. 7 and Feb. 12.