By Rita Trichur
Standard & Poor's Ratings Services is downgrading its
outlook for Canada's six biggest banks, making it the latest
credit-rating firm to cite concerns about Ottawa's plans to create
a so-called "bail-in" regime for troubled lenders.
The credit-rating company said late Friday that it revised its
outlook to negative from stable for Toronto-Dominion Bank, Royal
Bank of Canada, The Bank of Nova Scotia, Bank of Montreal, Canadian
Imperial Bank of Commerce and National Bank of Canada, the
country's six biggest banks by assets.
All six are considered "systemically important," which is the
Canadian government's parlance for "too big to fail." Standard
& Poor's dimmed outlook for the group comes a week after Ottawa
launched a public consultation on its proposed "bail-in regime."
That consultation period is scheduled to end Sept. 12.
Ottawa's bail-in proposal seeks to protect taxpayers from having
to foot the bill for bailing out a big bank in the event that it
runs into financial trouble.
The proposed measures would be used to stabilize a lender
grappling with such difficulties, while ensuring that shareholders
and creditors "are responsible for bearing losses," the government
said.
"The outlook revision reflects our expectation of reduced
potential for extraordinary government support arising from
implementation of the proposed new elements of the resolution
framework for Canadian banks," said Standard & Poor's credit
analyst Tom Connell in a release.
As a result, there is an increased likelihood that the proposed
"bail-in" regime could prompt Standard & Poor's to lower its
ratings on the "Big Six" within two years.
The proposed bail-in plan, formally called the Taxpayer
Protection and Bank Recapitalization Regime, includes measures to
help the government recapitalize a failing bank by converting
certain bank bonds to common equity. Ottawa's aim is to ensure the
overall financial system remains stable in the rare event of a bank
failure.
"The effect of the implementation of a bail-in regime could
raise a bank's probability of default, in our view, because of
reduced likelihood of extraordinary support from the government;
and more directly, the bailing-in of senior debt would be a default
with respect to those instruments, and for the issuing entity,"
Standard & Poor's said.
Moody's Investors Service has also changed its outlook on the
Canadian banking system to "negative" from "stable" because of
Ottawa's bail-in plans.
The Canadian government first announced plans to create a
bail-in regime in 2013. But unlike in the U.S. and Europe, no
Canadian banks failed or required bailouts during the global
financial crisis. And the Canadian government itself stresses that
the prospects of a major bank failure in this country are slim.
"In the highly unlikely event of a bank failure, the new regime
will enhance the stability of Canada's world-class financial system
by shifting the burden of recovery and resolution from taxpayers to
financial institutions and their shareholders and creditors,"
Finance Minister Joe Oliver said last week. "It will thereby ensure
that market participants clearly understand their obligations and
bear the consequences of the risks they take, and that taxpayers
are not on the hook to bail them out."
The last Canadian bank to fail was the Bank of Credit and
Commerce Canada in 1991, according to the Canada Deposit Insurance
Corp.
Write to Rita Trichur at rita.trichur@wsj.com