Canada to set higher capital requirements for key banks

Thu Mar 21, 2013 5:51pm EDT
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By Randall Palmer

OTTAWA (Reuters) - Canada's federal budget laid out plans on Thursday to impose higher capital requirements on banks whose failure could disrupt the Canadian financial system and economy.

Finance Minister Jim Flaherty also said the federal government would go ahead with its own capital markets regulatory framework if it cannot agree with the provinces on creating a common securities regulator.

And he said the government would review how it regulates financial institutions to ensure it promotes the entry and growth of smaller financial institutions in order to foster competition that helps consumers and businesses.

The new rules for "domestic systemically important banks" will parallel measures agreed by the Financial Stability Board, the financial watchdog of the Group of 20 leading economies, in response to the 2008 crisis.

Canada's superintendent of financial institutions will determine the higher capital requirement. The document did not name any particular bank.

The government will also implement a "bail-in" regime for these banks to ensure that, if a bank depletes its capital, it can be recapitalized through the very rapid conversion of certain liabilities into regulatory capital.

"This risk management framework will limit the unfair advantage that could be gained by Canada's systemically important banks through the mistaken belief by investors and other market participants that these institutions are 'too big to fail'," the budget document said.

Canada's biggest banks are Royal Bank of Canada (RY.TO: Quote), Bank of Nova Scotia (BNS.TO: Quote), Toronto-Dominion Bank (TD.TO: Quote), Bank of Montreal (BMO.TO: Quote) and Canadian Imperial Bank of Commerce (CM.TO: Quote).   Continued...

Canada's Finance Minister Jim Flaherty debates the federal budget in the House of Commons on Parliament Hill in Ottawa March 21, 2013. REUTERS/Chris Wattie