TORONTO — With the Canadian government moving forward with plans for a “bail in” regime that would keep taxpayers off the hook in the event of a bank collapse, ratings agency DBRS is maintaining its “negative” outlook on the country’s largest banks.
There is not yet enough information yet about how a bail-in would work to change the banks’ ratings to reflect the reduced government support, DBRS said in a report published Friday.
The negative trend applies to the senior and subordinated debt ratings of Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, the Canadian Imperial Bank of Commerce, and National Bank of Canada. It also applies to related short-term ratings that might be affected by a long-term rating change, DBRS said in a report published Friday.
The most recent move towards enacting the new structure for bank bailouts — in the form of bail-ins by existing securities holders — came on June 8 when the Budget Implementation Act was passed. It included proposed amendments to existing legislation to give the Office of the Superintendent of Financial Institutions authority to designate the domestic systemically important banks to which the bail-in regime would apply.
The Canada Deposit Insurance Corporation (CDIC) will also need new powers to carry out a bail-in by converting the eligible debt of a non-viable bank into common shares. This would enable the CDIC to resolve a failed bank by taking temporary control to carry out a bail-in conversion, according to DBRS.
While the government is moving forward, the process is still expected to take months, the ratings agency said. Amendments must be made to the Bank Act, the CDIC Act, the Financial Administration Act, the Payment Clearing and Settlement Act, and the Winding-up and Restructuring Act. In addition, regulations related to the legislation need to be developed and pre-published with time for consultation.
“Thus, even after the amendments are passed, there would be some months before the final steps are likely to be completed,” DBRS said.
The ratings agency changed its view on the trend for Canada’s largest banks to negative from stable on May 20, 2015, “to reflect the declining likelihood of systemic support” after the federal government committed to creating a bail-in regime.
“The maintenance of the negative trend reflects DBRS’s view that ongoing changes in Canadian legislation and regulation still indicate that the potential for timely systemic support for these six banks that DBRS considers systemically important institutions is declining,” the ratings agency said in the report.