Top Canadian Banks Deemed ‘too big to fail’

Toronto-Dominion Bank is one of six top Canadian banks that will be subjected to higher capital levels than other banks, in an announcement on March 26, 2013, by the Office of the Superintendent of Financial Institutions, which identified them as being big enough that their failure is capable of triggering a financial crisis. (Karen Bleier/AFP/Getty Images)

Canada’s six largest banks have been deemed too big to fail, the nation’s banking regulator announced this week.

The Office of the Superintendent of Financial Institutions (OSFI) identified the top lenders as being of “domestic systemic importance”—meaning they’re big enough that their failure is capable of triggering a financial crisis.

In light of this, the banks will be subjected to continued scrutiny, enhanced disclosure, and higher capital levels than other banks, said the OSFI.

The six banks are 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. Together the banks account for more than 90 percent of Canada’s total banking assets.

The move, which was widely anticipated, comes as part of ongoing efforts by global regulators to protect the financial system from another banking crisis.

“The measures we are announcing today are designed to limit the likelihood that a major bank would encounter distress or failure that could negatively impact the Canadian economy or taxpayers,” Julie Dickson, Superintendent of Financial Institutions, said in a statement Tuesday.

With the new measures, the six banks will be forced to comply with an extra one percent risk-weighted capital surcharge by early 2016—boosting the amount they hold of common equity tier one capital from 7 to 8 percent.

The changes come as part of a move to align Canada’s banking sector with so-called Basel III banking rules— a comprehensive set of reform measures developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision, and risk management of banks.

The committee released a framework last fall requiring national authorities to assess and designate domestic systemically important banks and determine a capital surcharge.

The framework follows the idea that by identifying the largest lenders and subjecting them to tighter regulation, they become less of a risk to their country’s financial system as well as the global economy.

The criteria used to determine the banks’ systemic importance include size, interconnectedness, substitutability, and complexity.

Barclays Capital analyst John Aiken said the announcement isn’t likely to affect the six Canadian banks’ 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 wrote 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.”