March 26, 2013 / 7:08 PM / 6 years ago

Canada ups financial oversight, tags "too big to fail" banks

TORONTO (Reuters) - Canadian authorities on Tuesday designated the country’s top six banks as “systemically important” to the domestic economy and increased oversight of a widely used global derivatives clearing system in an effort to reduce banking system risk.

The so-called too big to fail designation was widely expected by the market and means the six banks will have to keep more capital on hand than required by the Basel Committee on Banking Supervision after the 2008 financial crisis.

The banks, named soundest in the world for five years running by the World Economic Forum, are already in compliance with Basel III capital requirements. All but one meet the new tougher rules. Neither the United States nor the European Union have formally implemented the Basel standards yet.

“The measures we are announcing today are designed to limit the likelihood that a major bank would encounter distress or failure that could negatively impact the Canadian economy or taxpayers,” Julie Dickson, head of the Office of the Superintendent of Financial Institutions (OSFI), said in a statement.

The changes are in line with the focus that the Group of 20 rich and developing nations is putting on banks that play significant roles in their home countries. The G20 has already imposed additional capital requirements on banks deemed globally systemically important.

No Canadian bank is considered systemically important globally, but OSFI said the concentrated nature of Canada’s banking industry - the top six banks control more than 90 percent of the assets - meant the top players all required an additional capital buffer.

Canada’s top six lenders in order of size 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), and National Bank of Canada (NA.TO).

All six will be required to hold a minimum Tier 1 capital ratio of 8 percent as of January 1, 2016. As of the end of this past January, all but National Bank were already above that level, and National was just shy at 7.9 percent.

“We expect that when the dust settles the banks will be running at around 8.5-9 percent to give themselves a little bit of a buffer,” said John Aiken, an analyst at Barclays Capital.

Shares of the banks were little changed on Tuesday, as the move had been widely expected. There had been some uncertainty about whether National, which is considerably smaller than the other five, would be included.

The bank was not immediately available for comment.

CIBC World Markets analyst Robert Sedran said the banks’ strong capital positions means the additional buffer should not impact plans for capital outlays such as dividend hikes or buybacks.

“Given the pace of capital generation, we continue to view the issue of capital adequacy as more opportunity than risk,” he said in a note.


Separately, the Bank of Canada said it would formally regulate SwapClear, the dominant global system for centrally clearing over-the-counter interest rate swaps.

In a statement, the bank said clearing activity of Canadian institutions in SwapClear has increased substantially, in line with Canada’s G-20 commitment to centrally clear all standardized OTC derivatives.

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