TORONTO (Reuters) - Moody's Investors Service said on Tuesday it has revised its outlook on the Canadian banking system downward due to concerns the government is becoming less willing to bail out banks in the event of a financial crisis.
The revision of the outlook to "negative" from "stable", part of an annual review of the sector by the U.S.-based credit ratings agency, follows Moody's decision last month to revise its outlook lower on certain debt and deposit ratings at Canadian banks.
In both instances, Moody's cites concerns about the Canadian government's plans to implement a "bail-in" regime to avoid a taxpayer-funded bank bailout in the event of a crisis.
Under a "bail-in" system, certain bank debt can be converted to equity to avoid a liquidity squeeze in the event of a crisis.
"Our assumption has always been that the Canadian government would be very willing to support the major Canadian banks in the interest of economic stability and ensuring that the payment system operates correctly under times of stress," Moody's Canadian financial analyst David Beattie told Reuters.
"It's clear their intentions have changed."
Several countries, including Canada, have embraced the idea of bail-ins, although Canada has yet to unveil specific regulations establishing how they would be carried out.
Beattie said that the chance of an event that would require a bail-in to be activated is "extremely remote, in the low single digits probability".
Canada's banking sector escaped the 2008 financial crisis without a U.S.-style government bailout, and the country's top lenders have since rebounded quickly and have made several acquisitions both domestically and internationally.
In the report, Moody's said the banks' recent efforts to diversify their revenue streams - in the face of slowing loan growth at home - represents a growing risk to the stability of the industry.
The Moody's review focuses on the country's seven largest lenders, which are: Royal Bank of Canada (RY.TO), Toronto-Dominion Bank (TD.TO), Bank of Nova Scotia (BNS.TO), Bank of Montreal (BMO.TO), Canadian Imperial Bank of Commerce (CM.TO), National Bank of Canada (NA.TO) and Caisse Central Desjardins, Canada's largest association of credit unions.
Reporting by Cameron French; Editing by Peter Galloway