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Standard & Poor’s has announced:

Standard & Poor’s Ratings Services today said that it revised its outlooks to negative from stable on almost all Canadian banks to which we have ascribed ratings uplift for potential extraordinary government support in a crisis. We base this rating action on our view that the announcement of a proposed bail-in policy regime might lead us to lower ratings on the banks within two years. We are revising our outlooks on Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD Bank), The Bank of Nova Scotia (Scotiabank), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), and National Bank of Canada (NBC).

“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.
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We incorporate the potential for extraordinary government support in our ratings on the seven largest Canadian financial institutions. We evaluate the potential for extraordinary government support through an assessment of a bank’s systemic importance, in conjunction with our view of the government’s willingness and capacity to support one or more banks during a crisis. We assess seven Canadian financial institutions as having “high” or “moderate” systemic importance. We also assess Canada as being “supportive,” which is the middle of three categories in our framework for evaluating the tendency of a government to bail out a financial institution. The issuer credit ratings on the large Canadian financial institutions include either one notch (RBC, TD Bank, Scotiabank, NBC, and Caisse Centrale Desjardins) or two notches (BMO and CIBC) of uplift due to the potential for extraordinary government support.

This notching reflects our belief that the Canadian government, like other governments around the world, would face strong incentives to support a large institution in a crisis to preserve financial market stability. We base this on the size and interconnectedness of these banks, their importance to the economy, and the potential for the failure of one institution to destabilize the system as a whole. We believe there is a moderately high likelihood that the Canadian government would intervene to preempt a large bank’s failure.
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We might reclassify the Canadian government’s tendency to support a bank as “uncertain” from the current “supportive” category. We note that taxpayer protection is a primary goal of the bail-in policy, as the consultation document’s title reflects. We expect the Canadian government will take a pragmatic approach that balances policy goals and makes use of whatever options are available in the event of an impending bank failure. Canada has not prohibited capital injections to a distressed bank, but does include a capital injection from a federal or provincial government as a trigger event for the conversion of nonviability capital instruments and of bail-in debt. For jurisdictions we view as having an uncertain tendency to support banks, we do not apply any ratings uplift from a bank’s stand-alone credit profile, regardless of the bank’s systemic importance.

Alternatively, we could reduce our assessment of the systemic importance of some or all Canadian banks, to “moderate” or “low.” This could arise if we conclude that the array of resolution tools, including the bail-in option, would have the potential to materially reduce the potential for a bank failure to destabilize the financial system. For banks we view as having low systemic importance, we do not apply any uplift for extraordinary government support. For banks that we believe have moderate systemic importance, we would limit uplift of extraordinary support to one notch at most (assuming we view the government as supportive).

This announcement by S&P mirrors a a similar announcement by Moody’s last month.

Affected issues are
BNS.PR.A, BNS.PR.B, BNS.PR.C, BNS.PR.L, BNS.PR.M, BNS.PR.N, BNS.PR.O, BNS.PR.P, BNS.PR.Q, BNS.PR.R, BNS.PR.Y, BNS.PR.Z

BMO.PR.J, BMO.PR.K, BMO.PR.L, BMO.PR.M, BMO.PR.P, BMO.PR.Q, BMO.PR.R, BMO.PR.S, BMO.PR.T, BMO.PR.W

CM.PR.D, CM.PR.E, CM.PR.G, CM.PR.O

NA.PR.L, NA.PR.M, NA.PR.Q, NA.PR.S

RY.PR.A, RY.PR.B, RY.PR.C, RY.PR.D, RY.PR.E, RY.PR.F, RY.PR.G, RY.PR.H, RY.PR.I, RY.PR.K, RY.PR.L, RY.PR.T, RY.PR.W, RY.PR.X, RY.PR.Y, RY.PR.Z

TD.PR.O, TD.PR.P, TD.PR.Q, TD.PR.R, TD.PR.S, TD.PR.T, TD.PR.Y, TD.PR.Z, TD.PF.A, TD.PF.B

This entry was posted on Friday, August 8th, 2014 at 11:39 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.