Canada Says Six Largest Banks ‘Systemically Important’

Canada’s six biggest banks are systemically important and need to set aside more capital to safeguard against failure, the country’s banking regulator said.

The lenders include Royal Bank of Canada, Bank of Montreal (BMO), Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce, Bank of Nova Scotia and National Bank of Canada, the Office of the Superintendent of Financial Institutions said today in a statement. The six banks will be subject to a surcharge equal to 1 percent of risk-weighted capital by Jan. 1, 2016, the regulator said.

“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,” said Julie Dickson, Superintendent of Financial Institutions.

The surcharge adds to a requirement of the Basel Committee on Banking Supervision that lenders set aside at least 7 percent core Tier 1 capital of risk-weighted assets. The increase was largely expected by bankers including Royal Bank Chief Executive Officer Gordon Nixon.

“There are no surprises here,” said Sumit Malhotra, a financial-services analyst at Macquarie Capital Markets in Toronto. “Our view has been that Basel has asked for 7 percent, OSFI would ask for 8 percent, and that the banks would want about 50 basis points” on top of that. A basis point is one hundredth of a percentage point.

Additional Buffers

At the end of January, five of the six banks had Tier 1 common equity ratios ranging from 8.2 percent to 9.6 percent. National Bank, the smallest of the six by assets, had a 7.9 percent ratio.

The banks will be encouraged to have an additional capital buffer, Dickson, 55. said in a telephone interview.

“Institutions can find themselves with restrictions placed on dividends, and share buybacks, and that sort of thing, if they dip below 8 percent,” she said. “So that is an incentive to maintain your capital well above 8 percent.”

The S&P/TSX Commercial Banks Index was little-changed at 2183.51 at 4 p.m. in Toronto.

The country’s lenders may face additional changes beyond those announced today, Dickson said.

“Bank regulation, whether it be capital or other measures, is always evergreen and is always changing, depending on how the market develops,” she said.

‘Bail-In’

Finance Minister Jim Flaherty said in last week’s federal budget that banks identified as “systemically important” by OSFI will have to set aside more capital.

Banks on the list will also be subject to “bail-in” provisions that will require them to hold debt that can be converted into capital if that lender fails, reducing the need for a taxpayer-funded bailout, according to the budget.

The system “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 government said in its budget documents.

Canadian banks weren’t on a list of the world’s most systemically important banks released in July. The nation’s lenders have been ranked the world’s soundest for the past five years by the World Economic Forum.

Separately, the Bank of Canada said today it will regulate SwapClear, a system for clearing over-the-counter interest-rate swaps. SwapClear has “the potential to pose systemic risk to the Canadian financial system” because of its dominance in interest rate swaps, the central bank said in a statement.

To contact the reporter on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; David Scanlan at dscanlan@bloomberg.net

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