September 14, 2010 / 6:09 PM / 8 years ago

UPDATE 2-Canada watchdog lifts ban on bank dividend hikes

* OSFI imposed virtual ban on big capital outlays in 2008

* Move to lift constraints follows Basel III agreement (Adds stock reaction)

By Cameron French

TORONTO, Sept 14 (Reuters) - Canada’s financial services regulator has ended a two-year moratorium on large capital outlays by banks, which frees Canada’s well-capitalized banks to raise dividends, buy back shares, or make large acquisitions.

The lifting of the capital constraints, which the Office of the Superintendent of Financial Institutions (OSFI) posted on its website late on Monday, follows a weekend agreement on new bank capital requirements by global regulators studying how to avoid a repeat of the financial crisis.

“In light of the recent international developments providing greater certainty as to the reform of capital rules... (OSFI) will no longer require the increased conservatism in capital management,” the regulator said.

OSFI imposed more conservative capital management standards in 2008, pending development of the so-called Basel III rules, which are expected to be finalized at a Group of 20 summit in Seoul in November.

Regulators on the weekend agreed on a set of capital rules — to be submitted at the G20 — that were slightly less arduous than expected and included a long phase-in period that should give lenders plenty of time to build up any additional capital.

Canada’s banks, which did not require bailouts during the financial crisis, are already among the world’s best capitalized.


Even though the regulator has lifted its constraints, OSFI spokesman Rod Giles noted that details of the new regulations still must be ironed out.

“We have always advised institutions to be cautious and prudent,” he said.

In its statement, the regulator also imposed a set of conditions on financial institutions wanting to make a move that could affect capital levels.

Banks and insurers will have to prove that their capital levels are sufficient to meet any expected regulatory changes as well as “remote but plausible business scenarios that may adversely affect their ability to comply” with regulatory rules.

Shares of Canada’s banks, which have surged over the past three weeks as fears of a harsher regulatory regime have faded, did not react sharply to the news.


Some of Canada’s banks are in no hurry to raise dividends as profits have been held back by weak capital markets.

National Bank of Canada (NA.TO) is widely expected to announce a payout increase before the year is out, while Toronto-Dominion Bank (TD.TO) is also seen eager to raise its dividend.

TD, Royal Bank of Canada (RY.TO), and Bank of Montreal (BMO.TO) have also all indicated they could be on the hunt for acquisitions.

But given the tone of the OSFI statement, banks and insurers will likely want to be cautious about pulling the trigger on dividend hikes or any big takeover, said DBRS analyst Brenda Lum.

“OSFI does still expect sound capital management,” she said. “It’s just not as tight of a rein as before.” (Reporting by Cameron French; editing by Peter Galloway)

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