Canada's big 6 banks are too big to fail, regulator says

Canada's six largest banks have been designated as too big to be allowed to fail for the country by the federal regulator, meaning they will be subject to more stringent capital requirements and supervision.

The Office of the Superintendent of Financial Institutions said the designation stems from a framework issued by the Basel committee on banking oversight in October that set out guidelines for assessing domestic financial institutions.

Under the OSFI requirements, the Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank will be subject to an additional one per cent capital buffer for risk, meaning they will have to hold more assets in reserve to protect against a sudden run on deposits.

The banks will need to have a common equity tier 1 ratio of eight per cent as compared with seven per cent for smaller, less important financial institutions as of Jan. 1, 2016.

"The measures ... are designed to limit the likelihood that a major bank would encounter distress or failure that could negatively impact the Canadian economy or taxpayers," OSFI head Julie Dickson said in a news release.

In November, the Financial Stability Board updated its list of 28 international financial institutions that were assessed too big to fail, but none of the Canadian banks made the grade.

However, OSFI said the banks are systemically important to the Canadian economy by virtue of their size, interconnectedness, substitutability and flexibility.

Barclays Capital analyst John Aiken said the announcement was expected by markets and was unlikely to affect the bank's valuations.

"Given the capital positions of the banks under the Basel III guidelines and the fact that the transition will have three years to be implemented, we do not believe that this will be an onerous burden for the Canadian banks," he said in a note to clients.

"Further, given that the 100 basis point surcharge is broadly in line with the expectations of the market, we do not believe that today's announcement should have a material impact on the banks' valuations."

In its explanation, OSFI said a bank's distress or failure is more likely to damage the Canadian financial system or economy if its activities comprise a large share of domestic banking activity."

It noted the six biggest banks account for over 90 per cent of total banking assets in Canada and that "the differences among the largest banks are smaller if only domestic assets are considered, and relative importance declines rapidly after the top five banks and after the sixth bank (National)."