CHICAGO--(BUSINESS WIRE)-- The potential designation of Canada's six largest banks (Big Six) as domestic systemically important banks (D-SIBs) may increase capital requirements for those institutions under a framework established by the Basel Committee on Banking Supervision. Absent details on the implementation of the D-SIB directive, Fitch Ratings believes each of the six banks will be in a relatively strong position to comply with any additional D-SIB capital rules, primarily through retained earnings.
None of Canada's six largest institutions were deemed systemically important on a global basis by international regulators, and they were not included on the list of global systemically important financial institutions (G-SIFIs).The Basel Committee, together with the Financial Stability Board (FSB), in October, finalized the framework to be used by national bank regulators in identifying banks whose failure could cause significant disruption to the domestic economy and potentially cause broader cross-border financial stress.
This D-SIB framework was endorsed on Nov. 5 by finance ministers and central bankers at the G-20 gathering in Mexico City. This decision leaves domestic bank regulators such as Canada's Office of the Superintendent of Financial Institutions (OSFI) to put in place rules for D-SIB assessment.
The retention of consistency and compatibility at the domestic and international level is an important regulatory consideration. However, unlike the more prescriptive approach behind the G-SIFI framework, national authorities have some level of discretion in establishing their D-SIB regulations. Nevertheless, given the size of each of the top six banks in Canada and the highly concentrated nature of Canadian bank assets on the balance sheets of the Big Six , it is possible that all of them will be designated D-SIBs.
The major Canadian banks have generally emerged from the financial crisis with stronger fundamentals than their global peers. Furthermore, they are expected to be compliant with Basel III capital rules that become effective in 2013 in Canada, well ahead of the 2019 enforcement date stated by the Basel Committee.
The Canadian banks designated as D-SIBs will likely face additional regulatory requirements, presumably including a capital buffer above and beyond Basel III minimum capital requirements. Despite the potential unlevel playing field effect associated with such designation, compliance with any D-SIFI buffer requirement, in our opinion, would be manageable for the Big Six (Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of Montreal, and National Bank of Canada).
Retained earnings will be the primary source of additional capital. As such, D-SIB designation could have some influence on future dividend increases, share buybacks, as well as acquisition activity.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Fabrice Toka, +1-212-908-0369
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Source: Fitch Ratings