First Canadian Place at right and TD Bank Towers centre and left. File photos of downtown Toronto's financial district and area taken at night on Oct 27 2011.Fred Lum/The Globe and Mail
Canada's banking regulator is moving ahead with new requirements that it will use to assess the adequacy of a bank's capital, but one analyst says a new facet of this disclosure could make it harder to compare one financial institution with another.
The Office of the Superintendent of Financial Institutions released a draft of its leverage ratio guidelines on Wednesday, and is holding a consultation period until September 12. The changes will bring Canada's rules in line with the international framework favoured by the Basel Committee on Banking Supervision, which oversees global banking regulation. The final guidelines are expected by the year's end.
Much of Wednesday's release was in line with the leverage ratio requirements outlined in January, which said banks would be required to hold capital amounting to at least 3 per cent of their total assets. The figure is less than the 5 per cent of assets OSFI previously required banks to hold, but the new rule includes more securities and financial products in the calculations. Public disclosure of a bank's leverage ratio is set to begin by the start of 2015.
Though OSFI said the release should not contain any surprises for the market, CIBC World Markets analyst Robert Sedran found what he characterized as an "interesting wrinkle," one which could make it more difficult to analyze the relative strength of the banks' respective balance sheets.
Mr. Sedran's note to clients highlights the authorized leverage ratio that OSFI said it will "prescribe" individual banks, on top of the 3 per cent standard leverage ratio. These are confidential requirements whose details won't be made public, so there won't be a clear minimum ratio disclosed to investors.
"Though we have long suspected that different banks were treated differently by the regulator, we believe the public view was that OSFI treated all of its children equally," Mr. Sedran wrote.
There are several factors that will go into deciding a bank's authorized ratio, including performance, business plan and risk profile, OSFI says. Many of these factors would be challenging to quantify, Mr. Sedran said, and that the move both reduces transparency and diminishes the importance of disclosing the ratio.
In the past, OSFI has defended its approach to regulation including its confidential monitoring of banks' individual risk models, which are not publicly disclosed. In a speech in October 2013, OSFI deputy superintendent Mark Zelmer detailed his wariness over growing pressure toward regulating banks using simpler capital rules, explaining that OSFI supervisors "regularly conduct peer reviews and benchmark studies to cross-check bank modelling behaviour against their peers, on the premise that banks should be applying similar risk weights for similar risks."
The opacity of the proposed authorized leverage ratio doesn't present major risks because the banks are well capitalized, Mr. Sedran noted. But it does cloud whether the banks would be likely "to deploy or return excess common equity when compared with its peers," he said.
With files from Tim Kiladze.