Canada’s largest banks are heavily reliant on wholesale funding, which poses a higher refinancing risk, according to a report published on Monday by Moody’s Investors Service.
The funding strategies of Canada’s largest banks “result in a heavy reliance on wholesale funding compared to their global peers,” the report from the New York-based credit rating agency says. The average ratio of wholesale funding to tangible assets was 36% at the big banks, ranges from 30% for Toronto-Dominion Bank to 42% for National Bank of Canada, the report notes.
A heavy reliance on wholesale funding is generally considered a “credit negative — making a bank more likely to suffer periodic difficulties in refinancing its debt — which increases the risk of failure.” the report warns.
However, the big banks’ reliance on wholesale funding is also offset by the banks’ funding mix, and their large holdings of high-quality liquid assets, according to the report.
“While it’s true Canadian banks have a high reliance on wholesale funding, they also have high levels of less confidence-sensitive funding and sticky retail deposits, which improves the system’s overall funding profile,” says David Beattie, senior vice president at Moody’s, in a statement.
Moody’s believes that regulatory changes as part of the implementation of the new capital adequacy regime known as Basel III will encourage the banks to reduce their reliance on short-term wholesale funding, the credit rating agency’s report says.