One of the Story of the Week ideas we kicked around recently concerned Moody’s Investors Service downgrading the credit rating of six Canadian banks. We received some good feedback from viewers on how to approach the story, and it prompted me to make some calls to a few potential guests to get their thoughts on the downgrade, and the health of Canada’s banking system.
Since tonight’s program is about the financial collapse and the road to recovery, I figured it wouldn’t hurt to write a follow-up blog post about the Moody’s downgrade.
The ratings agency put Toronto-Dominion, Bank of Nova Scotia, Bank of Montreal, CIBC, National Bank, and Desjardins under review back in October (Royal Bank of Canada already saw its credit rating downgraded two notches last June). All six saw their credit rating downgraded by one notch.
In the report, Moody's says the downgrade "reflects our ongoing concerns that Canadian banks’ exposure to the increasingly indebted Canadian consumer and elevated housing prices leaves them more vulnerable to unpredictable downside risks facing the Canadian economy than in the past."
If you’re not familiar with what a credit rating downgrade means, the short answer is that it typically raises the cost of borrowing for the affected financial institution. So an Aaa rating, which is the highest, means it will cost that institution less to borrow money than a lower rating, like Baa3, which is the lowest on the Moody’s scale (none of the six Canadian institutions affected went below Aa2).
Why the cause for alarm then?
Well, that’s just it. There isn’t one.
Canada’s banking system has been ranked the soundest in the world for five years in a row, according to the World Economic Forum. Moody’s indicated as much in its report, saying that “the Canadian banks still rank amongst the highest rated banks in our global rating universe.”
When I asked Business News Network anchor Howard Green, author of a new book, Banking on America: How TD Bank Rose to the Top and Took on the USA, about our banks’ credit downgrade, he told me it isn’t that big of a deal.
"The banks themselves have been warning that things were going to slow down," Green said. "It’s not huge news."
To understand why Canada’s banking system has done so well despite the global financial crisis, I spoke to Brian Milner, senior economics writer for The Globe and Mail. He pointed to several factors, including stricter reserve requirements, strong retail businesses, and decisions made by the Conservative and Liberal governments to prevent banks from making disastrous decisions.
"Because our banking system is relatively small and dominated by a handful of big players, there are no outliers out there doing stupid things that are likely to blow up everybody," Milner said.
"In general, our natural conservative instinct has protected us."
Image credit: Mike Segar/Reuters.