Canadian Bank Regulatory Capital Requirements: Are They Tougher?

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.)

Regulatory Leverage Ratio Limits

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.

Tier 1 and 2 Capital Requirments

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).

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* 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.

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7 Comments

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7 responses to “Canadian Bank Regulatory Capital Requirements: Are They Tougher?

  1. Tippy Golden

    As a Canadian, I am a bit surprised by the glowing IMF report on Canada. Internally, the satisfaction rate is rarely glowing. With huge debates, in past years, over health care privatization and market deregulation.

    For example, about ten years ago, there was a huge debate in Canada over whether our government should allow our five big banks — which are now considered among the best in the world — to grow bigger by “merging” with the large American banks. The pro-merger argument was that our banks were “less competitive” would “fall behind” unless they were allowed to grow bigger.

    To the immense credit of the Chretien government, with Paul Martin as our finance minister, and David Dodge as our central banker, this did not happen. It cannot be over-stated how lucky Canadians are that our banks were not, in effect, sold to American banks.

    We now have a right-wing economist turned politician, Stephen Harper, as the prime minister in a — minority — Conservative government, and a new central bank governor who built his career working for Goldman Sachs. Ideologically, the Harper regime is closely allied with the previous U.S. administration under George W. Bush, with Hank Paulson as treasury secretary. If the Harper regime had won the 2004 election, I think our financial system and economy might be sharing the same plight of its American counterparts.

    I am note here that free-market “fundamentalists,” and private health care lobbyists, are much quieter these days in Canada.

  2. kiffmeister

    Thanks for the comment. You’re right, there is a bit of luck involved too, and it is funny how things have changed. Only a couple of years ago the IMF was suggesting that banks in Canada and other countries were under-serving marginal borrowers!

    Nevertheless, I think OSFI deserves some praise for remaining tough and vigilant against such strong headwinds…

  3. Tippy Golden

    Thanks Kiffmeister. Are you Canadian? If you worked at BOC I assume you are.

    I have to go to work now. But a question: I am a non-economist. What do you mean by “under serving marginal borrowers”.

    As for the folks who want to privatize our health care system. What planet did they come from ! GGrrrrrr

    • kiffmeister

      Yes I worked at the Bank of Canada for 25 years, so I am indeed very Canadian!

      As for “under serving marginal borrowers” I think we were thinking of recent immigrants and others who can afford to borrow but don’t yet have the credit history/standing.

      There actually is a small “Alt-A” market in Canada (about 5% of total loans) that serves self-employed individuals who can’t put forward T4s or whatever to prove their income.

      As for the health system, it’s great down here if you’re rich or have a great insurance plan (I do), but otherwise, you’re out of luck. However, the Canadian system isn’t perfect. IMHO there should be more options for those (doctors and patients) who want to do business outside the system. (That’s a personal opinion – I have no idea what current IMF thinking on this is.)

      • Tippy Golden

        Well I live in British Columbia and there has been plenty of privatization of healthcare to go around.

        From what I can tell the provincial government privatized: medical records (to Accenture); hospital laundry, food services, and janitorial services (last I heard the were shipping rail cars of hospital linen to Alberta for laundering and back); then there are private companies building hospitals that our government rents. (P3s)

        We also have for-profit medical clinics. But the “sticky wicket” (if I have my facts right) is, technically, for-profit doctors must either opt in or opt out of the public system, but they can’t have it both ways. But I think in practice the for-profit clinics are having it both ways. The government mainly looks the other way and once in a while a healthcare union takes the issue to court.

        That said, I’m also not sure the for-profit medical business is booming here. Mainly they make a lot of noise about how much we need them. Most Canadians with extra income use it to pay off their mortgage, or invest in a tax shelter for the children’s university education, or invest for retirement … or take a vacation.

        Having said this our universal health care system is still pretty awesome. As you know, anyone with a serious condition or illness (eg, premature birth, diabetes, cardiac arrest, stroke, organ transplant, HIV / Aids, cancer, catastrophic injuries, you name it) will get some of the best medical care available in a first world country.

        On top of this many companies and all the public sector employers top up this level of healthcare with dental, vision, prescription, paid sick days and other benefits. While the wealthy can buy all the private medical care they can afford.

        So there are plenty of options in Canada.

        Furthermore, as you know, universal health care makes our economy more competitive because businesses are not burdened by the cost of providing (or not providing) their workers with healthcare.

        I think the United States has — more than enough the resources — to provide a similar level of healthcare to its citizens. (After all Canada only spends 10% of GDP on health care). But I guess the problem is finding the political and logistical will to make this happen in the United States.

        In Canada we are long past debating whether a child from a low-income family, for example, is entitled to the best medical care our country can provide. Though apparently many Americans are still trying to figure this one out.

        Sorry to expound here. Maybe some American reading my comment will find it helpful. I think there is a great deal of misinformation and fear in the United States about how universal health care works.

        As for the IMF report on Canada. I surmise I am living in the perhaps the best country to weather a global recession. Mean time there’s another dust up in Ottawa. This time over whether employment insurance should be expanded.

  4. kiffmeister

    Sounds like things are very different in British Columbia (versus Ontario)! I forgot that health care is a provincial thing in Canada. However, I thought that there was a federal overlay that stopped outside-the-system medical services and extra billing.

    As for the IMF report on Canada, it certainly has been a proud moment for all the Canadians who work here! I will shortly be publishing a working paper on the Canadian mortgage market entitled “boring but effective”. I guess that about sums it up!

    • Tippy Golden

      I believe the “federal overlay” you refer to is the Canada Health Act. There have been federal and provincial court cases over interpretation. I am out of my depth here on the details.

      It will be interesting to read you paper on the Canadian mortgage market. I think it was not until 2006 (when the Harper regime formed a minority government) that Canada started to open the door to American-style mortgages.

      I believe the argument went something like this: Canadian mortgage lenders are falling behind, losing profit, we need to allow the innovative mortgage products underway in the United States … or something to that effect.

      All I can say is Chretien / Martin / Dodge and Team … definitely got something right.

      Sometimes boring is better.

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