Banks worldwide face an increasingly challenging operating environment. Bank systemic risk continues to rise, the US and Swiss banking systems have weakened due to the US subprime crisis, and a sharp fall in global credit growth is underway.

"Large, global banks in several major developed countries have been hardest hit by the US subprime crisis, marking this crisis out from more familiar, country-specific banking crises," says Richard Fox, Senior Director in Fitch's sovereign team. "The US 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 US, 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."

The fall in the US Banking System Indicator (BSI) to 'B' from 'A' reflects Individual rating downgrades for over 30 banks and bank groups since October.

"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 US banks have raised in excess of USD60bn in new capital to date, often in amounts representing 10% or more of a firm's capital base."

Developed countries in aggregate have more elevated macro prudential indicators (MPI) than emerging markets. Four developed countries are in Fitch's highest macro prudential risk category (MPI 3), of which Iceland continues to give most cause for concern; Fitch placed the three major banks' ratings on Rating Watch Negative (RWN) last week. Australia, Canada and Ireland are also MPI 3, though the trends exhibited there are nowhere near as extreme as in Iceland. Australia remains one of now only five 'very strong' (BSI A) banking systems (Luxembourg, the Netherlands, Spain and the UK are the others - all MPI 2). With the UK's Northern Rock an isolated bank failure, none of these countries have seen any large bank's Individual rating downgraded.

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.

Fitch's Bank Systemic Risk matrix shows the BSI and MPI side by side to emphasise that stronger banking systems, typically in developed countries, are better able to withstand the potential stress that Fitch's leading indicators of macro-prudential stress aim to anticipate. Azerbaijan and Iran have been in the weakest (E3) segment of the matrix for some time, although in Azerbaijan's case low credit to GDP is a mitigating factor. Russia remains in the 'D3' segment, now joined by Kazakhstan, Romania and Turkey. The dependence of Kazakhstan's banking system on external funding made it an early casualty of the global credit squeeze.

Credit growth is now slowing rapidly but strong sovereign support has averted systemic failure. Romania had one of the highest rates of real credit growth in emerging Europe last year and it shows no sign of slowing. By contrast, credit growth is slowing in Turkey. Like Slovakia, which also moves into the MPI 3 category, credit growth only just exceeded the MPI 3 threshold last year, in contrast to other emerging Europe MPI 3s where real credit growth ranged from 30-60%. Slovakia's banking system is relatively strong (BSI C) in emerging market terms.