U.S. government financial support and the potential for future support for banks is declining, although not entirely eliminated, according to a Fitch Ratings report.

In conjunction with this report, Fitch has taken rating actions resolving the Rating Watch status for 17 banks. The group of banks that Fitch believes would receive support if needed was reduced by more than 50%. Nonetheless, Fitch views the eight most prominent and systemically important banks, including the recent addition of Morgan Stanley and Goldman Sachs, as the sole candidates for support. The Support Rating Floor (SRF) for these banks is now at 'A', which has been lowered from 'A+'.

Fitch's actions are predicated on the view that one of the clear focal points of bank regulators in response to the current crisis should be to establish a framework to enhance market discipline and remove government financial support for troubled banks. Evidence of this trend can be seen in many of the major markets around the world. The response in the U.S. has been the most pronounced in terms of definitive legislative action.

The intent of the U.S. to move away from providing direct support to problem banks is evidenced in the recent rating actions. Fitch believes that while untested, the government has the framework to resolve large regional banks without support or disrupting the market.
 
While the intent to remove support from all banks is clear, Fitch believes still heightened risks and unsettled funding markets will not allow for the same approach to be applied to the largest and most interconnected banks without creating unwanted ripple effects.

While the framework and intent in the U.S. is clear, Fitch believes important aspects need further development. The most critical is the implementation of 'living wills' for covered institutions. The implementation of living wills would be enhanced by increased cross-border cooperation and harmonization of resolution regimes for internationally active financial institutions. This will be critical for regulators to deliver a credible framework to develop market confidence that large complex banks can be resolved effectively without support.

The full report 'U.S. Banks - Sovereign Support: When Does it End?' is available at www.fitchratings.com