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CIBC Chief Says Banks Need to Hit Higher Capital Targets Earlier

The world’s banks should strive to be ahead of schedule in meeting the higher capital requirement levels set by regulators, Canadian Imperial Bank of Commerce Chief Executive Officer Gerald McCaughey said.

“Moving more rapidly in the direction of the new regulatory requirements is something that we could improve on,” McCaughey said yesterday in an interview in New York. “There’s different adoption rates throughout the global industry and I think that sooner rather than later is the area we can improve.”

Banks worldwide are working to comply with new capital requirements by the Basel Committee on Banking Supervision under guidelines known as Basel III. The rules, to be phased in between January 2013 and 2019, ask regulators globally to boost capital requirements for banks, limit what instruments count toward capital and force banks to rely more on equity than debt for funding.

Canada’s banking regulator has said Canadian lenders should meet the Basel III capital requirements next year, well ahead of the 2019 deadline. CIBC, Canada’s fifth-biggest bank by assets, has the highest Tier 1 capital ratio among the country’s largest lenders. The ratio is a measure of the bank’s financial strength based on its equity as a percentage of risk-weighted assets.

“In the Canadian system, we’re moving to an early adoption,” McCaughey, 56, said. “Having everyone moving earlier would be a better idea, and that’s where I think the biggest area of improvement could be.”

McCaughey, who was named one of the 50 most influential leaders for 2012 by Bloomberg Markets magazine this month, says the world’s banks are “doing more right than they’re doing wrong” in a challenging environment.

More De-Leveraging

“Banks are, in general, adhering to the requirements of the de-leveraging environment with great uncertainty and new regulation,” McCaughey said. “Banks, by and large, are more risk-averse than they were in the past -- a positioning that I think is important.”

Still, banks need to “appreciate and accept” the current environment, McCaughey said.

“This environment is dominated by uncertainty, de-leveraging and re-regulation,” he said. “The de-leveraging process is something that will run for quite a few years, as will the re-regulation process.”

Banks should brace for even tougher rules by regulators as they move closer to their targets, McCaughey said.

“I do believe that there will be more requirements that will come in the future,” McCaughey said. “I don’t think that the new levels that are being set are the ending point.”

“The closer you get to various jurisdictions being able to meet the requirements, then the possibility of further requirements will be introduced,” he said.

Toronto-based Canadian Imperial was named North America’s strongest bank in the magazine’s second-annual ranking in its June issue.

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