Credit rating agency, Moody’s Investors Service, has affirmed its ratings on the major Canadian banks, albeit with generally negative outlooks. The ratings come amid expectations that the federal government will soon move to reduce the possibility of taxpayer bailouts for the big banks.
Moody’s announced today that it has affirmed its long-term ratings for the six largest Canadian banks and two other deposit-taking issuers. It also affirmed its negative outlooks for seven of those firms, noting that this reflects the possibility that Moody’s may soon reduce its assumptions of the systemic support that the banks currently enjoy.
Indeed, Moody’s says that it is expecting Canadian authorities to provide more details on their resolution policy for domestic systemically important banks in the next few weeks. In the latest federal budget, released on April 21, the government indicated that it intends to follow through on its commitment to develop a “bail in” regime designed to protect taxpayers and depositors from the damage that could be inflicted by the failure of a large, systemically important bank.
The proposed bail in regime would allow a failing bank to restructure without turning to taxpayers, or its depositors, for support. This will require legislation, followed by rules and guidance, the government said in the budget. Once the details of the proposed new bail-in regime are announced, Moody’s says that it will evaluate the feasibility of the government’s plan.
At the same time, Moody’s also assigned new counterparty risk assessments (CR Assessments) to eight Canadian banks and deposit-taking issuers today. These new metrics reflect its opinion of how counterparty obligations are likely to be treated if a bank fails. Moody’s notes that these scores are distinct from debt and deposit ratings in that they consider only the risk of default, not the expected financial loss in the event of a default; and, they apply to counterparty obligations and contractual commitments rather than debt or deposit instruments.
In most cases, the CR Assessment for Canadian banks is one notch higher than their senior unsecured debt and deposit ratings, which Moody’s says reflects its view that the authorities are likely to honour a failing bank’s operating obligations “in order to preserve a bank’s critical functions and reduce potential for contagion.”
“The ongoing evolution of banking resolution tools that include debt bail-in underscores the need to differentiate counterparty risk from bank debt ratings,” said David Beattie, senior vice president at Moody’s. “We believe that, although debt obligations and other capital instruments may be subject to loss in a resolution, counterparty obligations may be shielded in order to preserve the continuity of operations and avoid contagion.”