Canada's banking regulator said on Tuesday it would introduce new capital rules stricter than those proposed by global regulators.
Canada’s banking regulator said on Tuesday it would introduce new capital rules stricter than those proposed by global regulators to ensure banks can withstand financial shocks. The Office of the Superintendent of Financial Institutions said the changes were designed as an interim step before new global rules are phased in from 2022. The regulator said it would replace the current 50 percent capital output floor used by Canada’s banks with the Basel 2 floor, calibrated at 75 percent. That compares with a floor of 72.5 percent agreed by global regulators in December.
Global regulators agreed in December that banks could use their own models to calculate how much risk is on their books. A 72.5 percent floor means that banks can only vary from a standard model by no more than 27.5 percent. Canada’s regulator is proposing banks can only deviate by 25 percent. The move reflects a view in North America that European banks rely too much on their own internal models to decide how much capital they should hold against their loans. U.S. banks, for example, are more constrained by a leverage ratio, which measures equity capital to total assets.
“We have learned to not hesitate to make adjustments to international standards where we feel they are necessary to meet Canada’s objectives,” OSFI Assistant Superintendent Carolyn Rogers said at the 2018 Canadian Bank CEO conference in Toronto. Canada’s biggest five banks — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce — will each be affected by the move. Rogers said a transition to the new rules will begin next quarter and finish in the fourth quarter of 2018.