In its Monday downgrading of Canadian banks’ credit ratings, Moody’s said that rising consumer debt and high home prices could result in problems for financial institutions if the economy takes a turn for the worst.
Moody’s said that it had voiced concerns based on a rising consumer debt load that outpaced income gains. As of Sept. 30, Canadian household debt-to-income ratio reached 165 percent, a significant increase from 137 percent in June 2007, according to the Los Angeles Times.
“Growth in consumer debt has been driven by rising house prices, which have increased by approximately 20 percent since November 2007,” Moody’s said, the Los Angeles Timesreports.
Canada’s banks are rated second among the world’s financial institutions after Singapore. The banks affected, including the Bank of Montreal, Caisse Central Desjardins, the Canadian Imperial Bank of Commerce, the National Bank of Canada and Toronto-Dominion Bank, still have excellent credit ratings.
Canada’s housing market was able to pull through the global recession after the financial crisis, but Moody’s said the Canadian economy has been struggling and that several banks have substantial exposure to “volatile capital markets businesses,” according to the Los Angeles Times.
Moody’s also said that many Canadian banks rely on confidence-sensitive wholesale funding, which carries little public disclosure and would increase their vulnerability to market shocks.
“The rating agency believes the global trend towards imposing losses on junior creditors in the context of future bank resolutions reduces the predictability of such support being provided to the sub-debt holders of the large Canadian banks given the Canadian regulators’ broad legislated resolution powers,” Moody’s said, the Los Angeles Times reports. “The removal of support for subordinated debt is consistent with recent actions we’ve taken elsewhere, including in many European countries, reflecting the increased likelihood that sub-debt holders would be subject to burden sharing in the even support was required.”