First Canadian Place at right and TD Bank Towers centre and left.Fred Lum/The Globe and Mail
Canada's biggest banks still swear by the same motto: safety first.
Despite being chock full of capital, the Big Six banks have set a new bar for themselves to clear. Instead of simply holding enough capital to meet the 8 per cent Tier 1 common equity ratio enforced by the Office of the Superintendent of Financial Institutions, many now maintain ratios of 9.5 to 10 per cent.
When the banks reported quarterly earnings over the last two weeks, it became clear that the elevated capital levels they sported were not just a fad – they are the new norm. Canadian Imperial Bank of Commerce reported a 10 per cent ratio, while most rival banks reported ratios between 9 and 10 per cent. Several said they expect to stay near these levels into the future.
National Bank of Canada, the outlier at 8.7 per cent, has pledged to get its ratio up to 9 per cent, pronto.
The banks haven't said much on why they've all taken this route. The simplest explanation would be some sort of moral suasion from OSFI, where the regulator doesn't formally force them to hold more capital, but suggests it would be in their favour.
Asked whether that was the case, Bank of Montreal chief executive officer Bill Downe replied in the negative.
"Canadian banks historically had stronger capitalization than U.S. banks and European banks. We built our capital through the course of the recession faster than many others," he said, adding that the banks used a mix of retained earnings and equity issuance.
The new, elevated levels, "are in the context of Canadian banks generally showing global leadership," he said.
Mr. Downe also said that it is entirely possible for banks to have a bunch of capital and still be incredibly profitable. Not only was the most recent earnings season here in Canada proof of that, but Swedish banks are well capitalized and their return on equity figures are robust.
While the new minimums make Canada's banks looks good on the world stage, they aren't global leaders in every category. The new Basel III rules require banks to meet a minimum leverage ratio of 3 per cent – which does not vary based on the risk weighting assigned to the bank's assets – and the U.S. will require its own banks to meet a 5 per cent minimum. OSFI said it will enforce the 3 per cent target.
Tim Kiladze