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Photos of the TD Securities trading floor in Toronto on April 3 2013.

Fred Lum/The Globe and Mail

Canada's top banking watchdog is pushing back against a growing chorus of global regulators who want to simplify the way that banks calculate their capital cushions.

Coming out of the financial crisis that started in 2008, the chief global banking regulator, the Basel Committee on Banking Supervision agreed to implement tough capital buffers that would help the banks absorb losses in future crises. These buffers require banks to classify assets by degrees of risk and keep more funds on hand against assets in the riskier levels.

But lately there's been a push in the other direction. While the Basel Committee still argues that risk weightings are important, it claims that the weightings have made it hard to compare one bank to another. Each country has different rules for calculating risk, and sometimes banks within a single country use different risk models.

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Now the Basel Committee is considering proposals to monitor simple metrics such as non-performing assets to total assets, historical profit volatility and the leverage ratio. But while OSFI, the top Canadian regulator, agrees that it can be hard to compare risk models across banks, it is strongly urging its peers not to undo a good chunk of the past five years of work. "Simplifying the rule book will not change the game," deputy superintendent Mark Zelmer said at a conference Tuesday.

OSFI is particularly worried about the unforeseen consequences of relying on more basic methods to calculate bank risk. Chiefly, they fret that it will put too much emphasis on the regulators – who, outside of Canada, didn't have a good grip on their banking systems leading up to 2007.

"Simpler capital rules would likely require even more intensive supervision of individual banks," Mr. Zelmer said. "Capital rules are at best a basic, crude mechanism for encouraging banks to engage in sound risk management practices and for identifying how much capital they need to carry in support of the risks they run."

Whether regulators monitor simple capital rules or dig deeply into banks' more individualized models, they still have to work with the banks to ensure that they are managing their risks properly and that they are protected. The less complex the rules are, the harder it will be for Mr. Zelmer and his peers to assess the banks' health.

However, there is a notable subtext here. In addition to the first set of Basel III reforms that required higher levels of capital relative to risk-weighted assets, there is a second phase that emphasizes the leverage ratio, which doesn't weight assets by risk. By 2018, banks must hold capital that amounts to 3 per cent of their total assets.

OSFI is on board with the leverage ratio – and has long implemented a version of its own, known as the assets to capital multiple – but it hasn't said much publicly about the first set of Basel III rules, and whether OSFI would force its banks to surpass the minimum capital levels under this simplified model.

The regulator may have been keeping mum on the issue because Canada's banks capital levels arguably don't look as strong under the leverage ratio. Now that other major countries, like the United States, are floating ideas to surpass the Basel III minimums under the leverage ratio, OSFI is speaking up in favour of its preferred method of regulation.

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Risk management, Mr. Zelmer argues, requires complex calculations. "When it comes to using models, you can run but you cannot hide. There is no getting around the fact that discussions of bank capital requirements need to be grounded in the information provided by well-designed and properly used risk models."

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