Moody's affirms Canadian bank ratings and assigns counterparty risk assessments

Moody's Investors Service has today affirmed the long-term ratings on the six largest Canadian banks and two other deposit-taking issuers, as well as the negative outlook for the supported senior debt and uninsured deposit ratings of seven of those financial institutions. Although Moody's very high systemic support assumptions remain unchanged, the negative rating outlooks reflect the possibility it may reduce its systemic support assumptions in the future.

RATINGS RATIONALE

The negative outlooks are based on Moody's expectation that, within the next several weeks, the Canadian authorities will provide more details on the resolution policy for domestic systemically important banks. Once the details of the bail-in regime are announced, Moody's will evaluate the feasibility of the government's implementing a bail-in of senior creditors while maintaining financial stability and limiting any damage to the broader economy.

For its own business reasons, Moody's has withdrawn the outlooks for all subordinated instrument ratings of the Canadian banks. Please refer to Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com. Outlooks, which indicate the direction of rating pressures, are now only assigned to long term senior debt and deposit ratings.

Moody's also assigned Counterparty Risk Assessments (CR Assessments) to eight Canadian banks and deposit-taking issuers. CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails, and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than the likelihood of default and the expected financial loss suffered in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR Assessments are an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

In most cases, the starting point for the CR Assessment -- which is an assessment of the ability to avoid defaulting on its operating obligations -- is one notch above the bank's Adjusted BCA, to which Moody's then adds the same notches of support uplift as applied to deposit and senior unsecured debt ratings.

As a result, the CR Assessment for most Canadian banks is one notch higher than their senior unsecured debt and deposit ratings, reflecting Moody's view that authorities are likely to honor the operating obligations the CR Assessment refers to in order to preserve a bank's critical functions and reduce potential for contagion.

However, in the case of The Toronto-Dominion Bank, given its very high senior unsecured debt rating -- at Aa1 -- Moody's has also assigned a CR Assessment of Aa1(cr).

"The ongoing evolution of banking resolution tools that include debt bail-in underscores the need to differentiate counterparty risk from bank debt ratings." said David Beattie, a Moody's Senior Vice President. "We believe that, although debt obligations and other capital instruments may be subject to loss in a resolution, counterparty obligations may be shielded in order to preserve the continuity of operations and avoid contagion."