Canadian Banks - Update on Bail-ins

Moody’s cuts outlook for Canadian bank debt to negative over ‘bail-in’ regime

Barbara Shecter | June 11, 2014 12:19 PM ET

Canadian PressOttawa made it clear in the spring of 2013 that taxpayers would not be on the hook in the unlikely event that a Canadian bank needed to be bailed out.

 

 

As governments around the world implement “bail-in” provisions to avoid taxpayer-funded bank bailouts, Moody’s Investors Service took action in Canada on Wednesday by changing the outlook to negative from stable on some of the senior debt and uninsured deposits of Canada’s largest seven banks.

The ratings agency, which at the same time affirmed the long-term ratings of the banks, said it took the action on the supported senior debt and uninsured deposit ratings “in the context of previously announced plans by the Canadian government to implement a ‘bail-in’ regime for domestic systemically important banks.”

Moody’s also cited an “accelerating” global trend towards reducing the public cost of future bank “resolutions.”

Senior debt holders would take a hit before taxpayers would

David Beattie, a vice-president in the financial institutions group at Moody’s, said the Canadian government made clear in the spring of 2013 that taxpayers would not be on the hook in the unlikely event that a Canadian bank needed to be bailed out.

“Their objectives are to spare the public purse,” he said in an interview. “Senior debt holders would take a hit before taxpayers would.”

The changes by Moody’s affect all seven of Canada’s biggest banks, including Toronto-Dominion Bank, Royal Bank of Canada, and Bank of Nova Scotia.

Canada’s banks weathered the financial crisis of 2008 better than many of their international peers which required expensive taxpayer-funded bailouts to stay afloat. Since the crisis, governments and regulators around the world have been laying the groundwork for bail-ins. In some of these scenarios, creditors holding instruments such as a new breed of convertible bonds bear at least some of the burden of stabilizing a bank in crisis.

For the time being, Moody’s has left assumptions of “very high systemic support” outside the banks in place. However, the change in outlook reflects the possibility the ratings agency may reduce these assumptions in the future as details emerge about how Canadian bail-ins would work.

Source: http://business.financialpost.com/2014/06/11/moodys-downgrades-outlook-for-some-of-canadian-bank-debt-over-bail-in-regime/