Moody’s Investors Service announced upgrades to its ratings of the big six banks, and the Caisse centrale Desjardins, largely on the basis that they are likely “too big to fail”.

Royal Bank of Canada, TD Bank, Bank of Nova Scotia, Bank of Montreal, National Bank of Canada, CIBC and Caisse centrale Desjardins all had upgrades in the long-term deposit and senior unsecured debt ratings of each of these institutions by two to three notches.

The ratings uplift for each of the Canadian deposit-taking institutions in Moody’s rated universe is a product of the rating agency’s view that the probability of extraordinary support for senior obligations by the Canadian sovereign is very high, it explained. The upgrades came as part of Moody’s planned application of its joint default analysis methodology and its updated bank financial strength rating methodology.

Moody’s believes support probability is high because the failure of any of these institutions would be very disruptive to the Canadian financial system. In such a period of high financial distress, the Canadian government would face powerful incentives to stabilize the system by supporting the senior obligations of a troubled institution. Moody’s does not believe that subordinated and preferred stock claims would benefit from the same level of support, and those ratings have remained largely unchanged.

Moody’s also noted that the deposit and senior unsecured ratings at RBC and TD Bank were raised to Aaa, while the other four Canadian banks had their senior ratings raised to Aa1. Moody’s view that RBC and TD have better intrinsic financial strength than their peers – represented by their higher bank financial strength ratings – is the sole explanation for this differential in senior ratings. It stressed that it does not impute different probabilities of systemic support for the six large Canadian banks. In Moody’s opinion, the probability that the Canadian sovereign would support any of the six large Canadian banks in a period of extreme financial distress is 95%.