Royal Bank of Canada, Toronto-Dominion Bank and four other Canadian lenders’ rating outlooks were cut to negative by Standard & Poor’s, which cited regulations that seek to limit government support in a crisis.
Canadian officials issued regulatory proposals Aug. 1 aimed at relieving taxpayers from the burden of potential bailouts if key banks fail. The new rules mandate any new senior unsecured debt issued by a so-called systemically important bank must be convertible to equity if the firm faces insolvency. The proposals are open to public consultations until Sept. 12.
“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,” Tom Connell, a Standard & Poor’s credit analyst, said today in a statement.
The rules, which apply to Canada’s six largest banks, are part of an international push by Group of 20 nations to prevent government bailouts like the ones triggered in the U.S. and Europe by the 2008 financial crisis. The Canadian government is proposing that senior unsecured debt be subject to conversion into regulatory capital in the form of common shares, and that policy makers will have the power to cancel pre-existing common shares.
The new regulations would raise a bank’s probability of default because of reduced likelihood of support from the government, according to the statement.
An assumption of government support lifts the credit ratings of Royal Bank, Toronto-Dominion, Scotiabank and National Bank by one level each and two levels for Bank of Montreal (BMO) and CIBC, S&P said.
Moody’s Investors Service cut its outlook on the Canadian banks in June, citing the new regulations. Bank ratings could be cut by two levels as government support is taken away, David Beattie, a senior credit officer at Moody’s Toronto office, said at the time.
The eight-company S&P/TSX Commercial Banks Index has gained 10 percent this year, compared with the 0.6 percent decline of the KBW Index of 24 U.S. lenders.
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