The big six Canadian banks could be designated as systemically important within Canada, Fitch Ratings suggests.
While the banks would likely be able to absorb the additional capital requirements that would accompany such a move, it may impact their ability to raise dividends, buyback stock, or make acquisitions, the rating agency suggests.
In a research note published Tuesday, Fitch says that although none of Canada’s six largest banks were deemed systemically important on a global basis, they do face potential designation as domestic systemically important banks (D-SIBs). Last month, the Basel Committee on Banking Supervision and the Financial Stability Board (FSB) finalized the framework to be used by national bank regulators in identifying banks whose failure could cause significant disruption to the domestic economy and potentially cause broader cross-border financial stress.
And this new framework was endorsed on by finance ministers and central bankers at the G20 gathering in Mexico City earlier this week. Fitch notes that this decision leaves domestic bank regulators, such as Canada’s Office of the Superintendent of Financial Institutions (OSFI), to implement rules for assessing D-SIBs.
Unlike the more prescriptive global approach, national authorities have some level of discretion in establishing their D-SIB regulations, Fitch notes. “Nevertheless, given the size of each of the top six banks in Canada and the highly concentrated nature of Canadian bank assets on the balance sheets of the Big Six, it is possible that all of them will be designated D-SIBs,” it says.
If they are deemed to be systemically important, this could result in increases to their capital requirements, along with additional regulatory requirements. But, while the details of how this would be implemented are not yet known, the rating agency says that it believes that each of the six banks “will be in a relatively strong position” to comply with any additional capital rules, primarily through retained earnings.
“Despite the potential unlevel playing field effect associated with such designation, compliance with any D-SIFI buffer requirement, in our opinion, would be manageable for the Big Six,” it says. However, as retained earnings is expected to be the primary source of additional capital, it warns that “D-SIB designation could have some influence on future dividend increases, share buybacks, as well as acquisition activity.”