Canada’s banking regulator stated on Tuesday that it would be introducing stricter capital rules.
The new bank rules will be firmer than those suggested by global regulators. This move makes sure that the banks will be able to withstand financial shocks.
According to the Office of the Superintendent of Financial Institutions (OSFI), changes were meant to act as interim steps before new global rules are introduced in over a five-year period from 2022.
The regulator said that the current capital output floor used by Canada’s banks will be replaced with a more risk-sensitive Basel 2 floor, which is calibrated at 75 percent. This is better compared to a floor of 72.5 percent based on the agreed-upon standardized approach in December.
“We are strong advocates of the value of international standards in Canada but we have also never shied away from deviating from those standards where it makes sense in our domestic market,” stated Carolyn Rogers, OSFI Assistant Superintendent, during the 2018 Canadian Bank CEO conference held in Toronto.
Transition to the new rules will begin in the following quarter and end in the fourth quarter this year, Rogers added. It will be implemented ahead of the global directive.
“As usual, Canada is going for a faster timeline,” noted portfolio manager Steve Belisle.
There was a decided limit on the amount of percentage a bank can use when utilizing their own models for the calculation of risks on their books. A 72.5 percent floor would mean that banks can only vary from a standard model by only 27.5 percent.
“From what I know today, the changes are going to be very acceptable, gradual and implemented over time,” said Scotiabank CEO Brian Porter during the conference.
The Effects of the Change
Canada’s action reflects a common view in North America. They believe that European banks have been relying too much on their own internal models. Especially when it comes to deciding how much capital needs to be held against their loans.
Canada’s biggest five banks will all be affected by the move. This includes Royal Bank of Canada, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, and Toronto-Dominion Bank.
There were mixed results in the performance of the shares in Canadian banks on Tuesday. RBC and Scotiabank shares were up 0.5 percent, while Bank of Montreal climbed 0.8 percent. On the other hand, TD Bank shares dropped 0.3 percent, CIBC traded down 0.1 percent.
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