International banking regulators are expanding their definition of "too big to fail," opening the door to greater scrutiny of Canada's biggest lenders.
Last year, the Group of 20 nations endorsed special treatment for the world's largest banks, subjecting a list of 29 financial behemoths to extra supervision and higher capital requirements. Now, the G20 is set to add a second-tier of banks – those whose failure would go mostly unnoticed by the global financial system, but could wreak havoc within individual economies. Canada's largest banks most likely are in that group, meaning they are line for tougher standards, depending on how forcefully their regulator – the Office of the Superintendent of Financial Institutions – chooses to enforce the G20 agenda.
On Thursday, the Basel Committee on Banking Supervision, a group of international financial authorities that includes Canada, released its final recommendations for dealing with "domestic systemically important banks," or D-SIBs, stating clearly that national supervisors should draw up a list of such institutions within their borders. The Financial Stability Board, which was designated by the G20 to oversee international financial regulation, endorsed the document at meeting in Tokyo the same day. None of Canada's banks was named a "global systemically important bank," allowing them to avoid the extra reserve requirements now faced by institutions such as JPMorgan Chase & Co., Deutsche Bank AG and HSBC Holdings PLC.
Short of Canada ignoring the Basel guidelines, it's not obvious how its biggest lenders could avoid designation as D-SIBs. The six largest institutions – Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada – account for more than 90 per cent of all assets in the country's banking system.
The Basel recommendations are "very, very clear," said Ian Lee, a business professor at Ottawa-based Carleton University and a former banker. "It's pretty hard for the Canadian banks to step around the fact that they are domestically significant."
Finance ministers from the G20 still must endorse the D-SIB rules, something they are expected to do at a meeting in Mexico in November. Rod Giles, a spokesman for Canada's banking regulator, said OSFI still is reviewing the Basel report and "will be considering how best to implement it in Canada." Robin Walsh, a spokesman for Canadian Bankers Association, said the lobby group also was reviewing the Basel Committee's final recommendations and would be consulting its members.
Julie Dickson, the head of OSFI, opposes subjecting the biggest banks to special requirements, saying publicly on many occasions that doing so reinforces the notion that certain institutions operate with a government safety net.
The Basel Committee specifically is calling on national authorities to come up with a methodology for determining whether any of their banks are D-SIBs. The guidelines avoid dictating how this should be done, although there is a clear implication that any banks that are determined to be systemically important should be required to keep larger buffers against losses. The Basel guidelines say Each country's method for overseeing D-SIBs will be reviewed by its peers.
(Editors note: An earlier online version of this story incorrectly stated that HSBC Bank Canada was on a list of "global systemically important banks." The list referred to parent company HSBC Holdings PLC. This version has been corrected.)