Posted by John Kiff*
A recent article in Central Banking (“lessons for banking reform: a Canadian perspective”) took a close look at the role of Canada’s banking regulatory framework in relatively strong performance of Canada’s banks so far through this crisis. One of the key reasons is that the OSFI (Office of the Superintendent of Financial Institutions) imposes a leverage cap on Canadian banks.
Among the G7, only Canadian and U.S. bank regulators impose leverage caps. Elsewhere, two large Swiss banks, UBS and Credit Suisse, will be subject to leverage caps in 2013 (Table 1). (As part of their financial stabilization measures adopted in fall 2008, the Swiss financial market supervisor (FINMA) introduced a minimum leverage ratio that adjusts to downturns—while acknowledging the need to avoid enhancing the current downturn by tightening capital and other rules too early.)
The Canadian leverage cap is calculated on total (Tier 1 and 2) capital, and the U.S. cap on Tier 1 capital. OSFI includes some off-balance sheet exposures in its definition of assets, whereas the U.S. leverage calculation does not. (These off-balance sheet exposures include credit derivatives, financial standby letters of credit, guarantees, and surety arrangements.)
Canada’s minimum capital requirements are tougher than called for by Basel II, and all other G7 bank regulators (Table 2). Canadian banks have to hold Tier 1 capital of at least 7 percent (versus 6 percent in the United States) of risk-weighted (RWA) assets, and 10 percent (versus 8 percent in most other G7 countries) of RWA as total capital.
Although these comparisons do not account for potential differences in Tier 1 and 2 capital definitions from country to country, these are believed to be immaterial. However, supervisors may impose undocumented higher capital requirements on some banks (e.g., systemically important and/or large complex institutions).
* John Kiff is a Senior Financial Sector Expert at the IMF. These are his personal views, and should not be attributed to the IMF, its Executive Board, or its management. This post is based on a box he wrote in the recently-published IMF Staff Report for the Canada Article IV Consultation.