Moody’s Investors Service has revised its rating methodology for hybrid bank capital and subordinated debt, and, as a result, has placed all Canadian bank hybrid capital instruments on review for possible downgrade.

The rating agency said that it placed Canadian bank hybrid capital instruments (such as Tier 2A instruments, innovative Tier 1 instruments, and non-cumulative preferred shares) on review for downgrade “to reflect the likelihood that the owners of these instruments have a higher probability of incurring economic loss than the owners of other classes of Canadian bank debt.”

Moody’s says that throughout the financial crisis government interventions did not prevent events such as principal write-downs, distressed exchanges, or missed coupon payments on bank hybrids. As a consequence, it has revised its methodology “to capture the higher probability that owners of these instruments could incur economic loss beyond that which is suggested by the risk of subordination in liquidation.”

However, today’s rating action excludes the Canadian banks’ subordinated debt. All the ratings on these instruments were affirmed. Moody’s notes that subordinated debt ranks higher than hybrid capital instruments within the capital structures of the Canadian banks.

IE