S&P Downgrades 'Big Six' Canada Banks

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

  (END) Dow Jones Newswires
  Copyright (c) 2014 Dow Jones & Company, Inc.