Regulators in Canada and the U.S. are taking fundamentally divergent approaches to the capital adequacy of their banks, says a new report from New York-based Fitch Ratings, with Canadian authorities hiking their capital demands in preparation for growing risks and U.S. regulators easing their expectations.
The recent move by Canada’s banking regulator the Office of the Superintendent of Financial Institutions (OSFI) to boost the required capital buffer for domestic systemically-important banks (D-SIBs) by 25 basis points to 1.75% of risk-weighted assets (RWAs) “signals increased concern over the rising risks of high levels of household indebtedness relative to incomes and growing corporate leverage in a rising interest rate environment,” Fitch says in the report.
The move to bolster D-SIBs’ capital requirements “should add to resiliency during an expected economic slowdown in 2019-2020,” Fitch says. “Higher minimum capital requirements tend to lead banks to hold more capital, making them stronger on an economic basis, which is credit positive,” it adds.
While Canada is raising the capital requirements, U.S. regulators are easing capital rules for most banks by reducing or eliminating stress testing requirements, allowing greater capital distributions, and considering replacing capital ratios with simpler leverage requirements for community banks, Fitch says.
“U.S. regulators have considered implementing a countercyclical capital buffer but have not moved toward doing so,” Fitch adds.
Ultimately, the rating impact from these divergent approaches will depend on “how banks respond to, and operate under, their respective regulatory environments,” Fitch says.