In a research note DBRS says that its Canadian bank ratings do not excessively rely on the prospect of external support.

DBRS reports that its bank rating methodology, published in October 2006, includes the assessment of expected external support for banks as an important factor in determining the final rating. “Given this assessment is very subjective, as there is no explicit support mechanism, DBRS has not tried to quantify the probability of support but rather to assess the impact of the bank’s deterioration on the health of the financial system in Canada,” it says.

Moreover, it adds that DBRS believes the bank’s credit fundamentals are critical to the analysis, and as such the bank ratings do not excessively rely on expected external support.

“The expectation of some form of systemic external support can originate from either national institutions or regional banks with an important local market position,” it says. “Each of the Canadian banks was reviewed independently to assess their active role and participation to the clearing and settlement system and their contribution to the overall deposit system.”

Although there is no explicit support mechanism for the banks, it notes that the Bank of Canada has responsibility and authority for the oversight of major clearing and settlement systems for the purpose of controlling systemic risk. “In this context, systemic risk is defined as the risk that the default of one participant in a clearing and settlement system could lead, through the activities of the system, to the default of other institutions or systems,” it explains.

“As measured by market shares, including deposits, DBRS feels Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank have significant national market positions, while National Bank of Canada has very high participation in its regional market of Québec,” it concludes.