DBRS Maintains Negative Trend on Six Canadian Banking Groups as Progress Toward Bail-in Regime Continues

DBRS, Inc. (DBRS) has today maintained the Negative trend on the senior and subordinated debt ratings of the Royal Bank of Canada, The Toronto-Dominion Bank, the Bank of Nova Scotia, the Bank of Montreal, the Canadian Imperial Bank of Commerce, the National Bank of Canada and their subsidiaries. Additionally, the Negative trend has been maintained on related short-term ratings that might be affected by a long-term rating change under DBRS methodologies. The ratings were previously revised to Negative from Stable on May 20, 2015, to reflect the declining likelihood of systemic support. For details on the rating actions on specific banks, please see their separate press releases.

The maintenance of the Negative trend reflects DBRS’s view that ongoing changes in Canadian legislation and regulation still indicate that the potential for timely systemic support for these six banks that DBRS considers systemically important institutions is declining, leading to a likely change in DBRS’s support assessment to SA3 from SA2 for these banks. Currently, the six banks’ final ratings benefit from an uplift of one notch above their intrinsic assessments because of the SA2 support assessment.

The legislation enacting the bank recapitalization, or bail-in, regime is moving forward, but DBRS does not yet have sufficient clarity on the details of the implementation to remove the benefit of systemic support from the affected ratings. Most recently, the Budget Implementation Act (Bill C-15) passed on June 8, 2016, included proposed amendments to existing legislation to enable the appropriate statutory powers for the bail-in regime. According to the Department of Finance Canada, the proposed amendments include permitting the Office of the Superintendent of Financial Institutions to designate the domestic systemically important banks (D-SIBs) to which the bail-in regime would apply, providing new powers for the Canada Deposit Insurance Corporation (CDIC) to carry out a bail-in by converting the eligible debt of a D-SIB that was determined to be non-viable into common shares, enabling CDIC to resolve a failed bank by taking temporary control of a non-viable bank to carry out a bail-in conversion, updating the process for investors to seek redress and revising the amount of minimum regulatory capital and debt subject to the new bail-in conversion power for D-SIBs (Department of Finance Canada, Bill C-15 – Budget Implementation Act 2016, No. 1 - Part 4: Various Measures, http://www.fin.gc.ca/pub/C15/04-eng.asp (May 10, 2016)). This will require amendments to be made to the Bank Act, the CDIC Act, the Financial Administration Act, the Payment Clearing and Settlement Act and the Winding-up and Restructuring Act.

While implementation is moving forward, there are still additional steps in the process besides the passage of the necessary amendments that are expected to occur over the coming months. In particular, regulations related to the legislation need to be developed and pre-published with time for consultation. Thus, even after the amendments are passed, there would be some months before the final steps are likely to be completed. Nevertheless, as the process continues, DBRS expects greater clarity to emerge regarding the characteristics of the new regime, including when it will come into force. As more details emerge, DBRS will consider how this affects the likelihood of systemic support. In any event, DBRS will comment on significant developments as they occur in the coming months.

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