Toronto bank towers

The funding and liquidity positions of the Canadian banks is improving, although their reliance on wholesale funding remains relatively high, notes Moody’s Investors Service in a new report.

The rating agency says that the overall funding and liquidity profile of the Canadian banking system is improving, as the six big banks are reducing their reliance on wholesale funding, which is currently high compared with their global peers.

As a group, the Canadian banks trimmed their reliance on wholesale funding from 38% of tangible assets to 35% by the end of 2017.

The overall funding and liquidity profile of the Canadian banking system is improving as the six rated banks moderately reduce their reliance on wholesale funding, which is high compared to global peers, Moody’s Investors Service says in a new report.

The decline in reliance on wholesale funding is a credit positive for the banks, which have also upped their usage of secured funding, the report says, the secured funding is well collateralized.

“Despite systemic wholesale funding reliance in Canada, overall net liquidity for the system compares well with global peers,” says David Beattie, senior vice president at Moody’s, in a statement. “The Canadian banks’ large holdings of high-quality liquid assets, which are in part related to their capital markets operations, help mitigate the banks’ market funding reliance.”

Currently, Bank of Nova Scotia has the greatest reliance on wholesale funding, at 39%, the report says, while Toronto-Dominion Bank is lowest, at 29%. For most of the banks, their liquid resources exceed their wholesale funding levels, the report says, which is a favourable factor.

Nevertheless, high levels of wholesale funding remain a concern.

“While Canadian banks have stable retail deposit bases, the reliance on wholesale funding lends the possibility of periodic difficulties in refinancing its debt, which increases the risk of failure. In the event of negative public sentiment around a bank, its wholesale financiers are exposed to potential loss and may choose to withdraw, or not roll over their funds,” the report says.

Looking ahead, the impending introduction of a new bail-in regime for banks, along with the imposition of Basel III liquidity requirements in 2020, “will give banks a strong incentive to further improve their funding mix and boost their liquid resources,” the report says.