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Updated: Tue, 08 Jul 2014 17:46:12 GMT | By CBC News, cbc.ca

Moody's cuts bank outlook to 'negative' on Ottawa's bail-in rule



Moody's Investors Service lowered the outlook for Canada's banks to negative from stable in a report Tuesday, citing Ottawa's 'bail-in' law. Mark Lennihan/Associated Press

Moody's Investors Service lowered the outlook for Canada's banks to negative from stable in a report Tuesday, citing Ottawa's 'bail-in' law. Mark Lennihan/Associated Press

Investor ratings service Moody’s has changed its outlook for Canada’s biggest banks to negative from stable, citing concerns over the Canadian government’s plan to implement a “bail-in” system in the event of a bank failure.

The “bail-in” rule, included as part of the 2013 omnibus budget bill, asserts that the federal government would not necessarily bail out a bank on the brink of failure with taxpayer money.

Instead bank bondholders would be expected to assume the risk, though there is no guarantee that deposit-holders would not be hurt if they had more money in the bank than the $100,000 guaranteed by CDIC.

Canada has yet to set parameters for how a bail-in might work. Mark Carney, who was Bank of Canada governor at the time, said last April it was 'hard to fathom' a scenario where Canadians' deposits would be touched, as happened in the Cyprus bank failure.

Moody’s says the “negative” rating for the banking system will have no impact on the very strong individual credit ratings for the seven biggest banks – CIBC, RBC, TD, Bank of Montreal, Scotiabank, National bank and Caisse Central Desjardins.

Canada remains one of the highest rated banking systems in the world, Moody’s said in its report that recommended the downgrade in outlook. All of the banks are considered to have strong profiles in the domestic market.

Moody's senior vice-president David Beattie, author of the report, said he believed the risk of a bank failure was remote, but was concerned about the trend of governments worldwide to provide for bail-in measures, instead of the bailouts seen in 2008.

"They [Ottawa] want to make sure that senior creditholders of banks and debtholders of banks would share the burden if a Canadian bank needed to be recapitalized in the future," he said in an interview with CBC News.

Delay on the details

Moody's made the change as part of its annual review of Canada's banking system.

"We didn’t do anything at that point in time because we thought we’d be getting details and we’d be able to act on further information, however a year and a bit has passed and we haven’t got the details yet and we have a new finance minister which may delay things future," Beattie continued. 

Beattie pointed to some risks for Canadian banks in the next 18 months, including diversifying into riskier business areas and riskier markets as they seek out growth.

“Moody's also notes that while the potential for external shocks to the Canadian economy has receded, high household indebtedness and elevated housing prices remain key risks to banking system stability in Canada,” the ratings agency said.

Last month, Moody's downgraded its outlook on debt and deposit ratings at Canadian banks.

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