Canadian banks unfazed by new capital rules

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Canadian banks are mostly unaffected by revised rules that determine how much capital lenders must hold to bolster their balance sheets.

The new rules from the Basel Committee on Banking Supervision, the global banking watchdog, alter the leverage ratio – a blunt tool used to calculate the amount of capital a bank must hold relative to its total assets – regardless of their risk. Come 2017, banks must hold enough capital to cover at least 3 per cent of their total assets.

An early draft of the rule, released in July, was particularly harsh on "off-balance sheet" items, such as derivatives, which banks did not have to account for in previous capital calculations. Bank lobbyists argued the rules would be much too onerous for financial institutions.

The latest version still accounts for off-balance sheet items, but the way they are accounted for is much less restrictive. The same is true for repurchase agreements, which could have required a hefty amount of capital under the old draft guidelines.

Big European banks are expected to benefit the most from the revisions, and many of their shares popped on Monday. Deutsche Bank climbed 4 per cent while UBS rose roughly 2.5 per cent.

The effect on Canadian banks was rather muted, with little movement in their shares. Investor indifference largely stems from these banks' limited exposures to the likes of derivatives and repurchase agreements. While Canada's financial institutions certainly have exposure to these securities, their risk pales in comparison to other behemoth banks – though RBC is increasingly becoming a global player.

Canadian banks also strived to calm investors' nerves after the first draft of the leverage ratio guidelines were released last summer. At an investor conference, Royal Bank of Canada chief financial officer Janice Fukakusa told the crowd that the bank is "comfortable that [the leverage ratio] won't be a constraint going forward for us."

Toronto-Dominion Bank echoed those comments, with incoming chief executive officer Bharat Masrani telling investors at the same conference that TD has been a big proponent of stronger capital levels for banks, and that even though the leverage ratio hadn't been finalized at the time, "we are comfortable in meeting those rules."

Compare that with data released by the Basel Committee last fall that proved roughly one quarter of the world's biggest banks wouldn't have complied with the draft version of the leverage ratio had it been implemented in 2012. To get their balance sheets in order, many European lenders slashed risky assets and raised equity in 2013.

While Canada's banks aren't worried about meeting the minimum global leverage ratio, they are still waiting for final rules from the Office of the Superintendent of Financial Institutions, which will set the national leverage rules

OSFI has long argued that its assets-to-capital multiple (ACM), its own form of the leverage ratio, has served the country's banks well. But there are questions about whether it can still be used as the benchmark because it has traits that differ from those of the Basel Committee's.

Not only does the ACM exclude certain off-balance sheet items, it also gives the banks a capital break on residential mortgages insured by Canada Mortgage and Housing Corp. – effectively the federal government.

OSFI has long said that it is in favour of a global leverage ratio, but it still isn't clear how they will implement the Basel Committee's. A spokesperson said further details on the regulator's position will come this week.