New draft legislation to establish a bail-in regime for Canadian banks is likely a credit negative for the banks’ senior debt holders, says Moody’s Investors Service in a report published on Monday.
Last week, proposed legislation was introduced that would strengthen the ability of the authorities to deal with the looming failure of a Canadian bank. Among other things, it would expand the powers of the Canada Deposit Insurance Corp. (CDIC) to allow it to temporarily control failing bank, and to convert the bank’s non-common shares and liabilities into common shares.
“The proposed regime’s objective is to maintain the legal entity, contracts and critical services of a failing domestic systemically important bank (D-SIB), while also limiting the public cost through explicit burden sharing with senior debtholders,” the Moody’s report says.
Additionally, the proposal also includes amendments to the Bank Act to require D-SIBs to maintain a minimum capacity to absorb losses. “We expect capital plus “bail-in-able” senior debt to be required to equal 23% of risk-weighted assets,” the report says.
The rating agency expects that the legislation will be passed before the Parliament adjourns for its summer recess at the end of June. After that, the regulations setting out the details of the regime will be developed.
“We do not expect the law to take effect until late 2016 at the earliest. This would be followed by a transition period of up to three years, during which banks will amend their international medium-term note programs and build up a stock of bail-in-able senior debt to the requisite level,” the report says.
For now, Moody’s see the bill as credit negative for senior debtholders of banks “because it is part of a process that will reduce government support to banks and impose losses on senior debt holders of failing banks,” the report says. However, the credit rating agency will review this opinion as more details of the new regime are finalized.