May 16, 2016 / 12:37 PM / in 2 years

Canada regulator pushes back on tougher capital demands

TORONTO (Reuters) - Canada’s financial regulator is pushing back against some of the more onerous demands placed on banks since the 2007-09 financial crisis, rejecting public health checks on lenders and allowing them to operate with lower capital buffers than overseas rivals.

Buildings are seen in the financial district in Toronto, January 28, 2013. REUTERS/Mark Blinch

Speaking at the Reuters Financial Regulation Summit, Canada’s top banking regulator said the country’s biggest lenders, which survived the crisis relatively unscathed and avoided the taxpayer-funded bailouts that rescued U.S. and European banks, may not need to hold as much capital as overseas rivals because their loan books carry less risk.

“It’s certainly not out of the question that a capital requirement that would be appropriate in some other country is higher than we think is appropriate in Canada,” Jeremy Rudin, Superintendent of Financial Institutions (OSFI), said.

Given its smooth sailing through the crisis, Canada’s regulator is likewise not requiring the country’s biggest lenders to undertake the stress testing imposed upon U.S. and European institutions.

That is despite concerns over a potential housing crisis in Canada, as Toronto and Vancouver have spiked significantly in recent years, and a sharp increase in funds set aside by banks to cover losses from loans to oil firms.

Canada is reviewing requirements for banks’ leverage ratios and will make a decision in 2017 but it is unlikely to make as stringent demands as some overseas regulators, said Rudin, appointed in 2014 to a seven-year term regulating Canada’s financial institutions.

Global regulators, keen to make banks safer after the financial crisis, are focusing on the leverage ratio as a way to prevent banks from taking on too much risk and mitigate any attempts to circumvent other capital rules.

The leverage ratio measures the amount of equity a bank holds as a percentage of its loans. Critics say it does not take account of relative risk associated with different types of lending and penalizes lenders, such as Canadian banks, with a high proportion of less risky residential mortgages on their books, many of which are backstopped by the federal government.

U.S. regulators require the country’s biggest banks to maintain a leverage ratio of at least 5 percent, well above the minimum of 3 percent set by the Basel Committee of banking supervisors, while Britain’s financial regulator also asks banks to hold significantly more than the Basel minimum.

“With the nature of the Canadian system and the exposure that the Canadian banks have, if we were to raise the leverage ratio to as high as perhaps some other countries, we’re going to start to undermine the risk-weighted aspect of the capital framework,” Rudin said.

Canada has also marked itself out by choosing not to adopt the annual public stress testing of banks undertaken by regulators in the United States and Europe and increasingly seen as a key tool in ensuring banks’ resilience to market shocks.

“Our current view is that we don’t want to go there. Once you start publishing the bank’s specific results you add to that an element of public relations both for the bank and for the regulator and we think that’s going to get in the way of the value of it as a risk management tool,” Rudin said.

Rudin also said the regulator was talking to banks about their energy-related exposure.

“We talk to them about what their exposures are, how they’re evolving, how they’re managing them, what experience they are having, and what their contingency plan is for the plausible, if unlikely, case that things would deteriorate further,” he said.

Follow Reuters Summits on Twitter @Reuters_Summits

Reporting by Matt Scuffham; Editing by Meredith Mazzilli

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