Canadian banks are being asked to meet new global standards for capital well ahead of the rest of the world, but regulators have stopped short of imposing a made-in-Canada deadline.
Instead, the Office of the Superintendent of Financial Institutions said on Tuesday that it wants Canada's banks to surpass the new global standard for Tier 1 capital "as soon as reasonably possible."
Under new international banking rules agreed to in September, 2010, under the Basel III process, a meeting of financial regulators, global banks must increase their Tier 1 capital ratio to 3.5 per cent by 2013, and gradually boost that figure to 7 per cent by 2019.
Tier 1 capital, which includes common equity, is used to backstop a bank's lending operations. It can be easily liquidated to help absorb losses in a financial crisis, and is considered a key measure of a bank's financial strength.
OSFI said it sees no reason why Canadian banks should not be able to meet the new threshold well ahead of 2019. In announcing its plan for implementing new global capital requirements, the regulator did not set a deadline, but said it wants to see banks meet the 7-per-cent ratio "early in the transition period."
The lack of a hard deadline is interesting because it gives the Canadian banks some flexibility. Some of them, such as National Bank of Canada, Bank of Montreal and Canadian Imperial Bank of Commerce are likely to surpass that mark as early as 2013. Others, however, such as Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia, can plausibly take another year if necessary, observers said.
However, OSFI said it expects banks that have not met the 7-per-cent threshold will have to exercise restraint on deploying capital until that mark is reached. Under the new global banking standards, financial institutions around the world are boosting capital levels to buffer themselves against any future crisis.
Canadian banks emerged from the financial upheaval of 2008 mostly unscathed, compared with several European and U.S. banks.
With no firm deadline from OSFI, "Canadian banks further behind on the Basel III capital ratio … will have more time to reach the new standard without having to resort to disruptive actions," National Bank Financial analyst Peter Routledge said in a research note.
This could mean that Bank of Montreal, which is planning to finance part of its purchase of U.S. bank Marshall & IIsley Corp. with an $800-million common equity issue, may not need to go that route. BMO planned the stock issue in part to protect its Tier 1 capital ratio in advance of 2013.
With more flexibility, "the bank may not have to resort to a common equity issuance, or at least one as large as $800-million, to support its acquisition," Mr. Routledge said in the note.
A spokesman with BMO declined to comment on whether the bank is now reconsidering its plan. BMO chief executive officer Bill Downe is scheduled to speak at an investor conference in New York on Wednesday and is likely to address the bank's capital plans.
Though Canada's big banks are considered to be better capitalized than many of their global peers, Canaccord Genuity analyst Mario Mendonca said in a research note this week that some will have work to do to in order to reach the 7-per-cent mark by 2013.
Mr. Mendonca noted that several U.S. banks that spent the downturn shoring up capital have caught up to Canada's banking sector, and in some cases have surpassed their Canadian counterparts.
Canada's major banks have all said they intend to meet the new banking standards early. Analysts expect some Canadian banks will increase their dividends this year after a two-year freeze aimed at preserving capital.
Grant Robertson