Investor ratings service Moody’s has changed its outlook for Canada’s biggest banks to negative from stable, citing concerns over the Canadian government’s plan to implement a “bail-in” system in the event of a bank failure.The “bail-in” rule, included as part of the 2013 omnibus budget bill, asserts that the federal government would not necessarily bail out a bank on the brink of failure with taxpayer money.Instead bank bondholders would be expected to assume the risk, though there is no guarantee that deposit-holders would not be hurt if they had more money in the bank than the $100,000 guaranteed by CDIC.Canada has yet to set parameters for how a bail-in might work. Mark Carney, who was Bank of Canada governor at the time, said last April it was 'hard to fathom' a scenario where Canadians' deposits would be touched, as happened in the Cyprus bank failure.
While Canadian banks presently have very strong ratings, looking forward, growth may be difficult to achieve without adding significant risks.
Much of the country has an overvalued residential real estate with a consumer that has debt level similar or higher than the American consumers before the bubble burst down south in 2006/2007.
The next 12 to 24 months will prove quite interesting if real estate begins to unwind as we suspect.
Perhaps the question is what will trigger the event?
Rising interest rates from record low levels?
A slowing in a petroleum dominated economy in the Western part of the country?
A stock market correction that ramps up investor fear and prompts cash savings?
Bank inter-connectivity would quick show up if derivative swaps begin to unwind.
The recent trouble in a Portuguese bank should keep us cautious.