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Interest rate and inflation are generally like two sides of a coin. When one moves one way then the other side follows it. Although it seems to be a general norm but it may not hold ground for long. In 2008 during the financial meltdown Canadian government rushed to help the so-called systematically important banks.

Through different programs the government helped the banks to have easy access to funds. Later on the government realized that it has exposed itself a little more than what it should have been. Therefore in 2013 budget it tried to correct the situation by introducing a new bell–in program.

Canadian government is still evaluating the bail-in regime program proposal. It is not clear how the program will be implemented but we know that it will not be easy on the banks. It talks about forcing a delinquent bank to liquidate its protected debts to raise equity to recapitalize the bank.

The rating agencies who rate the financial institutions and governments – have been looking for ways to include the negative impact of government bailouts in their ratings. It looks like that they have found a simpler way to address the problem.

Today Moody’s announced that it has changed its outlook to negative on seven largest Canadian banks’ supported ratings.

  1. Royal Bank of Canada
  2. Bank of Nova Scotia (BNS)
  3. Toronto-Dominion Bank
  4. Bank of Montreal (BMO)
  5. Canadian Imperial Bank of Commerce
  6. National Bank of Canada (NA)
  7. Desjardins Group

As an explanation Moody’s has said the following:

These actions are taken in the context of previously announced plans by the Canadian government to implement a “bail-in” regime for domestic systemically important banks and the accelerating global trend towards reducing the public cost of future bank resolutions through such burden-sharing.

It expects the regulators to come up with a draft within a year or year and a half.

The banks declined to comment to the media but they should have gotten the message already. In order to withstand any blow from the regulators it has to start stocking. The banks will explore all the avenues to increase income.

Raising the interest rate a bit more to increase the spread between bond yield and mortgage rate will earn them a few extra bucks. This announcement may put the banks to reconsider the mortgage rate competition.