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Demonstrators march to protest government austerity measures in Greece Sept. 11 (LOUISA GOULIAMAKI)
Demonstrators march to protest government austerity measures in Greece Sept. 11 (LOUISA GOULIAMAKI)

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Why bank dividend hikes may not be on a grand scale Add to ...

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OSFI unleashes Canadian banks Canada's bank regulator is unleashing the major banks from restrictions that had been aimed at preserving capital, allowing them to resume dividend increases, share buybacks and acquisitions. The Office of the Superintendent of Financial Institutions had held the banks to restrictions during the financial crisis, but after a weekend meeting of regulators in Basel, Switzerland, is freeing their hand. The central bankers and regulators met on the weekend and agreed to new capital rules with a phase-in period. The Canadian banks are expected to have no issues meeting the new requirements.

In a statement on its website last night, OSFI said it still expects "sound capital management" by the country's deposit taking institutions "but will no longer require the increased conservatism in capital management" that it announced in late 2008.

Superintendent Julie Dickson had signalled this in an interview with Globe and Mail banking reporter Grant Robertson last week, surprising analysts who had expected the freedom would come later.

While analysts aren't necessarily expecting share buybacks, they are anticipating dividend increases. Last week, after Mr. Robertson's article, analyst Andre-Philippe Hardy of RBC Dominion Securities said Toronto-Dominion Bank and National Bank of Canada would be in a position to move first.

Today, though, National Bank Financial warned investors not to expect too much now that the handcuffs are off. Canada's banks are well-capitalized as far as the new rules are concerned, but they aren't over-capitalized, it said.

"A windfall of share buybacks, acquisitions, or exceptionally large dividend raises are not around the corner for bank investors. Rather ... this week's reformed bank capital rules herald a new 'phase' in Canadian banking, as opposed to a new 'era.' We expect banks to proceed cautiously on all new capital actions such as dividend raises, share buybacks, and acquisitions. For starters, we project small, 2-4 per cent increases in dividends at each of Canada's banks by the first half of [fiscal]2011. Acquisitions and buybacks will follow but we expect them to be constrained by continuing developments on the regulatory front.

"... Canada's Big Six banks are in a position of capital strength, one which they may wish to lever for the benefit of their shareholders. Outside the bounds of prudent, sustainable capital management, we believe the regulator will seek to stay out-of-the-way of bank decision-making in this regard. At the same time we expect bank boards to continue to be respectful of the regulator's mandate to maintain a well-capitalized, stable banking system."

Carney's version of the new bank rules Bank of Canada Governor Mark Carney is promoting the new Basel III bank capital rules in a speech in Berlin today, lauding the benefits and discussing the costs. There are several steps banks can take to meet the new rules, which will be phased in, Mr. Carney said in a speech at the German central bank. They could raise capital in the markets or, in time, generate what's needed internally through retained earnings. They could also pass on some of the costs to customers through higher interest spreads or higher fees, he added, or shed assets.

"Past experience suggests that banks will use a combination of all these methods," Mr. Carney said in the text of the remarks. "However, to be conservative, the Basel report assumes that banks would recoup the cost of higher capital and liquidity requirements entirely through higher lending spreads.

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