UPDATE 1-Fitch downgrades UBS, puts other banks on review

* Economic, market, regulatory challenges citedBy Lauren Tara LaCapraOct 13 (Reuters) - Fitch Ratings downgraded UBS AG on Thursday and placed seven other U.S. and European banks on credit watch negative, citing challenges in the economy and financial markets, as well as the impact of new regulations.The ratings agency lowered UBS’s long-term issuer default rating to A from A+.Fitch is also reviewing ratings for Barclays Bank Plc, BNP Paribas , Credit Suisse Group AG , Deutsche Bank AG , Societe Generale, Bank of America Corp , Morgan Stanley and Goldman Sachs Group Inc for further possible downgrades.The cuts would in most cases be one notch and in some cases two notches, Fitch said. A lower bond rating can make debt more expensive to issue and lead to higher collateral requirements.Earlier on Thursday, Fitch also lowered its ratings on Royal Bank of ScotlandLloyds Banking Group PLC two notches to A from AA-.Exposure to the European debt crisis and concern about the business model of pure-play investment banks were catalysts for most of the ratings actions, Joo-Yung Lee, a managing director in Fitch’s financial institutions group, told Reuters.“Some of these banks have greater reliance on wholesale funding and greater reliance on what we view as volatile trading earnings,” Lee said. “That’s particularly true of Goldman Sachs and Morgan Stanley in the U.S. They are less diverse than their global universal bank peers."In the case of Bank of America, its exposure to mortagage-related litigation was a driver for Fitch’s review. Competitors like Wells Fargo & Co and JPMorgan Chase & Co were not targeted because they have diverse business models, steady funding streams and no company-specific issues that put them at serious risk, Lee said.Fitch does not have a specific deadline to finish its review, but Lee said it hopes to resolve the matter quickly to reduce market uncertainty.

UPDATE 1-Fitch eyes Volksbanken group viability rating

* Welcomes plans for mutual liability pact at Austrian groupVIENNA, Oct 18 (Reuters) - Fitch Ratings put Austrian banking group Volksbanken-Verbund’s (VB-Verbund) ‘bb+’ viability rating on rating watch negative on Tuesday, citing concerns about flagship lender Oesterreichische Volksbanken AG (OeVAG) (OTVVp.VI).Austria’s fourth-biggest bank, which failed a stress test this year, said last week it would post a 2011 loss, form a mutual liability pact with its regional bank shareholders, and not repay a tranche of state aid due this year.Fitch said OeVAG “continues to face material challenges in relation to its capital position, risk profile and business model, despite considerable deleveraging efforts since 2008”.It said it could downgrade VB-Verbund’s viability rating by more than one notch once it had assessed prospects for the group’s capital position, financial strength and business model.Fitch said net profit generated at its regional bank owners would probably not offset OeVAG’s expected group loss of around 500 million euros ($690 million) this year.Fitch had in July flagged concerns about OeVAG’s ability to strengthen core capital. On Tuesday it cited the postponement of announced measures to bolster OeVAG’s balance sheet at a time of rising capital needs for European banks.Of these, only the planned sale of its eastern European arm Volksbank International to Russia’s Sberbank this year was still on track, Fitch noted.It welcomed OeVAG’s plan to reorganise group structure along the lines of Dutch lender Rabobank, which it said was “likely to strengthen corporate governance, risk management control and consolidated supervision”. ($1 = 0.727 Euros)