OSFI calls six major Canadian banks ‘systemically important’

OTTAWA—The federal financial supervisor has slapped a too-big-to-fail label on Canada’s six largest banks, declaring they will need to carry a bigger capital buffer and be subjected to stricter supervision than their smaller peers.

The Office of the Superintendent of Financial Institutions said the “systemically important” designation stems from a framework issued by the Basel committee on banking oversight in October that set out guidelines for assessing domestic financial institutions.

Under the new OSFI requirement, the Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank will be subject an additional one per cent capital buffer for risk.

The banks will need to have a common equity tier 1 ratio of eight per cent as compared with seven per cent for smaller, less important financial institutions as of Jan. 1, 2016.

“The measures … are designed to limit the likelihood that a major bank would encounter distress or failure that could negatively impact the Canadian economy or taxpayers,” OSFI head Julie Dickson said in a news release.

Economics professor Ian Lee of the Sprott School of Business said the change was not a surprise given the dominance of the big banks, but that Canadians should not be concerned about the banking sector.

“I really do believe they are the most solid, secure, safest banks in the world and the World Economic Forum has said so five years in a row, so it’s not just me saying that,” he added. “We also have a very diligent regulator, unlike the Europeans.”

In November, the Basel, Switzerland,-based Financial Stability Board updated its list of 28 international financial institutions that were assessed too big to fail.

None of the Canadian banks made the grade.

However, OSFI said the banks are systemically important to the Canadian economy by virtue of their size, interconnectedness, substitutability and flexibility.

The new rules sets up a three-tier hierarchy for capital requirements to guard against failure: a Basel floor for non-systemic banks; a middle ground for domestically important banks like the six in Canada; and a higher requirement for global super-banks.

Barclays Capital analyst John Aiken said the announcement had been expected by markets and was unlikely to affect the banks’ valuations.

“Given the capital positions of the banks under the Basel III guidelines and the fact that the transition will have three years to be implemented, we do not believe that this will be an onerous burden for the Canadian banks,” he said in a note to clients.

“Further, given that the 100 basis point surcharge is broadly in line with the expectations of the market, we do not believe that today’s announcement should have a material impact on the banks’ valuations.”

Lee agreed, saying he believes the markets will “shrug” at the announcement.

The only possible repercussions are that the banks may wind up restricting their stock buyback and dividend programs, but even that is far from certain, he said.

In its explanation, OSFI said a “bank’s distress or failure is more likely to damage the Canadian financial system or economy if its activities comprise a large share of domestic banking activity.”

It noted the six biggest banks account for over 90 per cent of total banking assets in Canada and that “the differences among the largest banks are smaller if only domestic assets are considered, and relative importance declines rapidly after the top five banks and after the sixth bank (National).”