Six largest Canadian banks deemed “systemically important”

125px-Flag_of_Canada.svgThe Office of the Superintendent of Financial Institutions, Canada’s banking regulator, said on Tuesday that the nation’s six largest banks are deemed “systemically important” and will need additional capital reserves to cushion against financial shocks.

“The measures we’re announcing today are designed to limit the likelihood that a major bank would encounter distress or failure that could negatively impact the Canadian economy or taxpayers,” Julie Dickson, the superintendent of the OSFI, said, according to Bloomberg.

Banks that will be subject to increased capital standards include the Royal Bank of Canada, Bank of Montreal, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Nova Scotia and National Bank of Canada.

The banks will be subject to a surcharge equal to one percent of risk-weighted capital by 2016, in addition to a requirement of the Basel Committee on Banking Supervision that banks set aside at least seven percent Tier 1 capital of risk-weighted assets, Bloomberg reports.

At the end of January, all of the banks but National Bank had Tier 1 common equity ratios ranging from 8.2 percent to 9.6 percent. Dickson said that banks will be encouraged to hold even more capital.

“Institutions can find themselves with restrictions placed on dividends and share buybacks and that sort of thing, if they dip below eight percent,” Dickson said, according to Bloomberg. “So that is an incentive to maintain your capital well above eight percent.”

The announcement comes after Canadian Finance Minister Jim Flaherty said last week banks deemed “systemically important” would be required to hold additional capital reserves and will also be subject to “bail-in” provisions that will require them to hold debt that could be converted to capital in the event of the institution’s failure.

The bail-in system “will limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other participants that these institutions are too big to fail,” Bloomberg reports.

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