The Globe and Mail, James Bradshaw, 9 January 2019
The chief executives of Canada’s largest banks are shrugging off tougher capital requirements introduced by the banking regulator, saying the change will have no impact on plans for acquisitions, dividend hikes or share buybacks.
Last June, the Office of the Superintendent of Financial Institutions (OSFI) revealed for the first time that the country’s six largest banks must hold extra capital, called the “Domestic Stability Buffer,” as an added cushion to help them cope in the event of an economic downturn. The regulator promised public updates on the buffer at least twice a year, and at its first opportunity in December, chose to boost it to 1.75 per cent from 1.5 per cent of a bank’s risk-weighted assets, starting April 30.
The move caught investors and analysts by surprise, as OSFI highlighted “systemic vulnerabilities” in Canada’s economy, suggesting that it is watching closely for signs of strain. Analysts speculated that OSFI’s swift move could fuel expectations that the buffer would continue to be nudged higher, adding to constraints imposed on banks since the last financial crisis.
But at a conference in Toronto on Tuesday, the CEOs of Canada’s big banks responded with a collective yawn.
“It doesn’t change anything,” said Toronto-Dominion Bank CEO Bharat Masrani.
Bank of Montreal CEO Darryl White said he sees “no impact” on the way he manages the bank, even if OSFI were to reduce the required buffer again, “because we wouldn’t chase them down.”
Royal Bank of Canada CEO Dave McKay said RBC will continue to “manage our surplus capital with the same margins," and Canadian Imperial Bank of Commerce CEO Victor Dodig said the move “hasn’t changed our view on what is the right level of capital for CIBC.”
An OSFI spokesperson declined to speculate on “future actions by the banks should stress conditions materialize,” but said that banks “are responsible for their own capital management strategy.”
In recent public comments, OSFI officials have voiced concerns over high household debt relative to incomes and uncertainty about housing markets, even as bank executives insist that Canada’s economic fundamentals are still sound. In raising the required buffer, OSFI assistant superintendent Jamey Hubbs said that “in light of positive credit performance and generally stable economic conditions, now is a prudent time for banks to build resilience against future risks to the Canadian financial system."
Currently, Canada’s Big Six banks must keep their common equity Tier 1 (CET1) capital ratios – a key measure of a bank’s resilience – at or above 9.5 per cent. That consists of a base level requirement of 4.5 per cent, a 2.5-per-cent “capital conservation buffer,” an extra 1-per-cent surcharge because of their size, plus the newly disclosed Domestic Stability Buffer. After April 30, the minimum will be 9.75 per cent.
Yet Canada’s six biggest banks had CET1 ratios ranging from 11.1 per cent at Bank of Nova Scotia, which recently completed a string of acquisitions, to 12 per cent at TD, as of Oct. 31, and appear to believe they’ve built adequate reserves.
“We’re so massively ahead of the buffer anyways, it doesn’t change anything,” said National Bank of Canada CEO Louis Vachon.
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The chief executives of Canada’s largest banks are shrugging off tougher capital requirements introduced by the banking regulator, saying the change will have no impact on plans for acquisitions, dividend hikes or share buybacks.
Last June, the Office of the Superintendent of Financial Institutions (OSFI) revealed for the first time that the country’s six largest banks must hold extra capital, called the “Domestic Stability Buffer,” as an added cushion to help them cope in the event of an economic downturn. The regulator promised public updates on the buffer at least twice a year, and at its first opportunity in December, chose to boost it to 1.75 per cent from 1.5 per cent of a bank’s risk-weighted assets, starting April 30.
The move caught investors and analysts by surprise, as OSFI highlighted “systemic vulnerabilities” in Canada’s economy, suggesting that it is watching closely for signs of strain. Analysts speculated that OSFI’s swift move could fuel expectations that the buffer would continue to be nudged higher, adding to constraints imposed on banks since the last financial crisis.
But at a conference in Toronto on Tuesday, the CEOs of Canada’s big banks responded with a collective yawn.
“It doesn’t change anything,” said Toronto-Dominion Bank CEO Bharat Masrani.
Bank of Montreal CEO Darryl White said he sees “no impact” on the way he manages the bank, even if OSFI were to reduce the required buffer again, “because we wouldn’t chase them down.”
Royal Bank of Canada CEO Dave McKay said RBC will continue to “manage our surplus capital with the same margins," and Canadian Imperial Bank of Commerce CEO Victor Dodig said the move “hasn’t changed our view on what is the right level of capital for CIBC.”
An OSFI spokesperson declined to speculate on “future actions by the banks should stress conditions materialize,” but said that banks “are responsible for their own capital management strategy.”
In recent public comments, OSFI officials have voiced concerns over high household debt relative to incomes and uncertainty about housing markets, even as bank executives insist that Canada’s economic fundamentals are still sound. In raising the required buffer, OSFI assistant superintendent Jamey Hubbs said that “in light of positive credit performance and generally stable economic conditions, now is a prudent time for banks to build resilience against future risks to the Canadian financial system."
Currently, Canada’s Big Six banks must keep their common equity Tier 1 (CET1) capital ratios – a key measure of a bank’s resilience – at or above 9.5 per cent. That consists of a base level requirement of 4.5 per cent, a 2.5-per-cent “capital conservation buffer,” an extra 1-per-cent surcharge because of their size, plus the newly disclosed Domestic Stability Buffer. After April 30, the minimum will be 9.75 per cent.
Yet Canada’s six biggest banks had CET1 ratios ranging from 11.1 per cent at Bank of Nova Scotia, which recently completed a string of acquisitions, to 12 per cent at TD, as of Oct. 31, and appear to believe they’ve built adequate reserves.
“We’re so massively ahead of the buffer anyways, it doesn’t change anything,” said National Bank of Canada CEO Louis Vachon.
