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RBC joins ranks of global banks deemed ‘too big to fail’

An RBC Financial Group sign is seen in downtown Toronto.

Fred Lum/The Globe and Mail

Royal Bank of Canada has officially joined the ranks of global banks deemed too big to fail.

The Financial Stability Board (FSB), an international body based in Basel, Switzerland, and headed by Bank of England Governor Mark Carney, has added RBC to the list of 30 global systemically important banks, which must set aside larger capital buffers and face more onerous oversight.

RBC is the lone Canadian bank on the list, joining 16 other institutions, including Morgan Stanley, Banco Santander SA and UBS AG in the lowest and least onerous of five tiers used to sort what are known as G-SIB banks. At that level, banks must hold an extra 1-per-cent capital buffer. RBC would be phased in by January, 2019, but said it already meets the higher capital standard.

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For years, RBC skirted the threshold to qualify as a G-SIB as it increased revenue and expanded its footprint outside Canada with the purchase of Los Angeles-based City National Bank in 2015. In Canada, RBC has been one of six major banks labelled as systemically important from a domestic lens – a D-SIB – since 2013.

In a statement, RBC said its inclusion on the list "reflects the size and scale" of its global operations and that the bank "already meets the requirement of a 1 [per cent] capital buffer so does not expect any impact to its capital position with this designation."

The G-SIB tag comes with other duties, such as detailed planning for resolvability and higher supervisory expectations. It can also push compliance costs higher.

In Canada, the federal government requires banks to draft resolution plans – known as "living wills" in the United States – that test various scenarios to show how a bank could be wound up in an orderly fashion in the unlikely event it fails. Canada's blueprint draws on key principles set out by the FSB and aims to maintain customers' access to critical banking services, all the while protecting taxpayers from having to shoulder losses.

Now RBC's plan also has to measure up to regular assessments by the FSB.

"This designation will not change RBC's strategy; nor will it impact clients or have a significant impact on shareholders," an RBC spokesperson said.

Banks are deemed systemically important when their failure would risk triggering a financial crisis. As a result, these financial institutions have been colloquially dubbed "too big to fail" – a label some banks are keen to avoid.

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RBC is Canada's largest bank by market capitalization but trails Toronto-Dominion Bank by a narrow margin when measured by assets.

"This is hardly a surprise, and it is not a stretch to suggest this bank has always been systemically important to the global financial system (at least a little)," said Rob Sedran, an analyst at CIBC World Markets Inc., in a research note. After gauging reactions from RBC's management and Canada's banking regulator, he concluded: "The lasting impact on the shares of this announcement should be limited."

The Office of the Superintendent of Financial Institutions (OSFI) noted in a separate statement that Canada's D-SIB banks are already subject to a capital surcharge, enhanced supervision, recovery and resolution planning and increased disclosure – obligations that generally align with the FSB's framework. "Consequently, RBC is well-positioned to meet the G-SIB requirements starting in January, 2019," the federal regulator said.

"OSFI seems fine with [RBC's] capital position (and that's what matters)," said Gabriel Dechaine, an analyst with National Bank Financial Inc., in a research note.

In recent months, OSFI has been working to implement a "bail-in" regime that would allow authorities to shore up a failing bank by converting certain debt securities to avoid the need for a bailout funded by taxpayers.

The designation of RBC as a G-SIB bumped France's Group BPCE, owner of corporate and investment bank Natixis, from the list of 30. The remaining 29 on the list remained the same, although some were shuffled to different tiers. Notably, Citigroup Inc. moved down to the third tier, leaving U.S. giant JPMorgan Chase & Co. as the lone bank in the stricter fourth tier, which requires an added buffer of 2.5 per cent.

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There are no banks in the fifth, most stringent tier.

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About the Author
Banking Reporter

James Bradshaw is banking reporter for the Report on Business. He covered media from 2014 to 2016, and higher education from 2010 to 2014. Prior to that, he worked as a cultural reporter for Globe Arts, and has written for both the Toronto section and the editorial page. More

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