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G-20’s Phased-in Capital Rules May Disadvantage Canadian Banks

The Group of 20 agreement to push for gradual increases in bank capital may put Canadian lenders at a disadvantage by creating an unlevel playing field relative to other countries, a banking group said.

“I don’t think we want jurisdictions that have behaved well, like Canada, to be forced to move in and adopt the rules before other countries that may be in worse shape,” Canadian Bankers Association Chief Executive Officer Nancy Hughes Anthony said in an interview. “What we’re all looking for is a level playing field.”

Group of 20 leaders meeting in Toronto yesterday said countries should adopt “significantly higher” capital standards by the end of 2012, though banks can phase in capital increases during a transition period that takes into account each country’s “circumstances.”

“That is potentially a real issue for Canada; that’s a little bit of a wrinkle,” Bank of Montreal deputy economist Doug Porter said.

European and U.S. banks would be in “no rush whatsoever” to build up to the stronger capital levels of Canadian lenders under a phase-in approach, Porter said.

“That might allow them to play on a slightly tilted playing field,” Porter said. “Canada would be in a much stronger shape from a competitive standpoint over the next few years, but it’s not clear that’s going to be a case since other countries will be allowed to phase in new rules over a fairly long period.”

Korea Summit

Leaders said they will seek final agreement on capital rules at a summit in Seoul in November when the Basel Committee of Banking and Supervision, made up of international central bankers and other officials, will propose a road map.

“The rules, whatever they’re going to be, have to be consistently applied,” Hughes Anthony said. “I don’t think good performance should be penalized when it comes to implementing these new rules.”

The Basel committee is racing against a December deadline set by G-20 nations, and banks faced with raising what UBS AG estimates may be $375 billion of fresh capital are appealing to nationalist sentiments to ease the pain.

The G-20 didn’t agree on a global bank levy that was promoted by countries including the U.S., France and Germany, and opposed by nations whose banks fared better in the financial crisis, such as Canada and Brazil. The G-20 statement mentioned the tax as an option for some countries, while other countries could pursue different measures.

The G-20 statement “is an endorsement of the key principles of reducing systemic risk, which are capital and leverage, and keeping away from red herrings like bank taxes,” Royal Bank of Canada CEO Gordon Nixon said.

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