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Moody's: gov't to shift more risk to banks' creditors, creating negative outlook

TORONTO - Moody's Investor Services has cut its outlook for the Canadian banking system to negative due to an expected reduction of government support for the sector, but says it still believes the individual banks and the overall system are among the strongest in the world.

The outlook change is based on the Canadian government's plans to shift more burden to the banks' creditors — and away from taxpayers — in the event of a major financial crisis like the one in 2008-09, Moody's analyst David Beattie said Tuesday.

But he said there's no reason for the Canadian public to be alarmed by the "negative" outlook that Moody's put on the banking system, replacing a "stable" outlook that had been in place since August.

"The Canadian banking system remains one of the highest-rated banking systems in the world," Beattie said.

The New York-based agency's ratings are intended as a guide to investors and institutional money managers. Ratings by Moody's and other agencies are among the factors used by investors to determine bond prices and yields.

All of Canada's big banks are in the double-A range on the Moody's scale, which goes from triple-A at the top to default at the bottom.

"The probability of a double-A rated bank getting into trouble, and requiring assistance in any form, is in the low single digits. So it's very remote," Beattie said in an interview Tuesday.

"But we guard against complacency and, notwithstanding the fact that they are very highly rated banks, bad things can happen."

Canada's banking system has been touted by politicians and business leaders as one of the most stable in the world in the wake of the recent financial crisis.

The Harper government has also supported efforts to prevent the bank bailouts that happened in the U.S. and Europe during the crisis from occurring in Canada.

Beattie said the Finance department is expected to bring in legislation that will clarify the rules for what would happen in the event of another major meltdown — and that will shift more of the risk to the banks' investors through a "bail in" regime that contrasts with a government "bail out" that would use taxpayers money.

"Canada has yet to really clarify how the system is going to work in Canada but it's clear to us that within the next 12 to 18 months, which is the extent of our outlook, we will have further details and they will not be positive for senior creditors," Beattie said.

However, Beattie said the negative outlook issued Monday isn't a comment on the stability of the banking system or the individual banks. "It's a comment on how the losses will be allocated if it comes to that."

Moody's notes Canada's banks have had enduring earnings power, mainly because of their domestic operations. But it also says the Canadian banks are venturing into more risky businesses and countries, which could dilute the strength of their domestic credit and reduce the overall system's stability.

The Canadian Press

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