New bail-in rules for banks will affect their credit ratings’ support component

The new bail-in rules for Canada’s banks reduces the likelihood of government support for a failing bank, which will lower the support component of their credit ratings, says Fitch Ratings Inc. in a note published on Monday.

New rules were implemented in fall 2018 that aim to reduce the prospect of taxpayer bailouts by empowering Canadian banking authorities to impose losses on investors, in the event that a major Canadian bank—one of the domestic systemically important banks (D-SIBs—runs into financial trouble. In this new environment, Fitch’s note says that government support for a failing bank no longer is certain, so the credit-rating agency will be lowering its support ratings and support rating floors in the first quarter of 2019.

“As bail-in rules empower authorities to impose losses on creditors in the event of a potential D-SIB failure, Fitch anticipates that government’s propensity to support has diminished such that it can no longer be relied upon,” the note states.

“Canada’s bail-in regime and reduced propensity to support banks follows similar actions in other developed markets, whereby policymakers are seeking to push the cost of a failed bank onto investors rather than taxpayers,” Fitch’s note says, pointing out that it has already lowered these factors for banks in the U.S. and Europe.

Nevertheless, the planned reduction in the Canadian banks’ sovereign supports isn’t expected to lead to any change in the banks’ underlying credit ratings.

Fitch’s note also points out that under the new regime, the banks have until November 2021 to build up required total loss absorbing capital.

“A number of banks have successfully issued bail-in eligible debt in recent months, albeit at slightly higher rates than non-bail-in debt, proving the market for these new securities,” Fitch’s note states. Canadian banks will need to replace legacy senior debt equivalent to approximately 6%-9% of risk-weighted assets, which Fitch expects to be built up over one to two years.

Staff

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