Canadian banks said stricter rules will put them on an uneven playing field with global competitors
As the US Federal Reserve moves to ease its proposed capital requirements for big banks, all eyes are turning to whether Canada’s banking regulator will follow suit.
The Office of the Superintendent of Financial Institutions (OSFI) faces growing pressure from the banking industry to reassess its stricter rules amid concerns about competitiveness and lending capacity.
The Federal Reserve announced this week that it would delay planned capital increases for major US banks, cutting the hike from 20% to around 9%. The decision came after months of opposition from US banks, which argued that higher capital buffers would limit their ability to lend, particularly to small businesses and individual borrowers.
The move signals a significant shift in the global regulatory landscape, particularly for banks involved in high-risk trading activities.
For Canadian banks, which have already raised concerns about tougher capital rules, this development raises questions about whether OSFI will maintain its stance on new capital requirements.
Last year, OSFI moved forward with Basel III capital regulations, a global framework designed to strengthen banks’ resilience after the 2008 financial crisis. While OSFI granted a one-year delay on certain capital floor increases in July, many in the industry fear that Canada’s biggest banks could face an uneven playing field if the US and Europe ease their own requirements.
“We cannot get out of sync with our two major competitive markets, Europe and America,” RBC chief executive Dave McKay said earlier this year, adding that Canadian banks could be forced to either charge more for loans or accept lower returns if they face tougher rules than banks in other countries.
Gabriel Dechaine, a veteran bank analyst at National Bank Financial, warned in June that the new capital requirements could restrict lending and reduce profits for Canadian banks. He also pointed out that Canadian banks risk becoming less competitive if they are held to stricter standards than their international counterparts.
OSFI, however, has remained firm in its commitment to financial stability. In response to the Federal Reserve's recent announcement, the regulator reiterated that its decision to delay the capital floor increase was intended to give the regulator time to monitor developments in other countries.
“The purpose of the one-year delay was to give OSFI time to consider the implementation of Basel III reforms in other jurisdictions,” the regulator said in a statement. “Consistent with this announcement, OSFI continues to monitor implementation progress across jurisdictions.
Read more: OSFI postpones stricter bank capital rules
“These reforms will strengthen banks’ ability to withstand financial shocks and support economic growth while enabling them to compete and take reasonable risks,” OSFI said. “We will continue to measure implementation progress of the Basel III 2017 reforms across jurisdictions with a focus on both competitive balance in banking and the soundness of Canada’s capital regime.”
John Aiken, a bank analyst and head of Canadian research at Jefferies, noted that OSFI has historically taken a more conservative approach than the US Federal Reserve, meaning that the Canadian regulator may not immediately follow the Fed’s lead. However, the July delay gives OSFI some flexibility.
“We will probably get some news a couple of months before the current stay of execution expires,” Aiken told the Financial Post. “It is not their style to react to other countries’ reports... However, given the recent pause announced by OSFI, this will likely extend it until there is greater certainty of where the Fed is heading.”
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