Canadian banks could adopt new global capital rules more quickly than international rivals, one of the country's senior financial regulators said on Wednesday, with measures set to be introduced later this year bringing them closer to the new requirements.
The Office of the Superintendent of Financial Institutions (OSFI) said on Tuesday it would replace the current capital output floor used by Canada's banks with the more risk-sensitive Basel 2 floor, calibrated at 75 per cent, a change designed as an interim step before the new global Basel 3 rules are phased in over a five-year period from 2022.
The regulator is consulting with banks on the implementation of Basel 3 but Assistant Superintendent Carolyn Rogers said that a 10-year timeline for implementation was unnecessarily long and that Canada could introduce the new rules more quickly.
"We moved faster on the first round of Basel 3 capital rules, and it served the Canadian market and Canadian banks well," Rogers told reporters on Wednesday during an interview in her Toronto office. "You can expect we'll move faster on the final round as well."
Global regulators agreed in December to a limit on how much banks could use their own models to calculate how risky their lending is. They plan to implement a 72.5 per cent floor by 2027 which means that banks can only vary from a standard model by no more than 27.5 per cent. Under the proposals, the floor would start at 50 per cent in 2022.
What U.S. policy outcome will have the biggest impact on the fortunes of Canadian banks?
The implementation of Basel 3 in Canada is subject to a public consultation due to be launched by OSFI in the spring. Ahead of the consultation, Rogers said Canada could begin the process of implementation before 2022 and finish before 2027.
"We are strong advocates of the value of international standards in Canada but we have also never shied away from deviating from those standards where it makes sense in our domestic market," she said in a speech on Tuesday to the 2018 Canadian Bank CEO conference in Toronto.
Canada's new interim rules will be brought in ahead of the global directive. Rogers said a transition to the new rules will begin next quarter and finish in the fourth quarter of 2018.
Canada's biggest five banks - Royal Bank of Canada (RY.TO), Toronto-Dominion Bank (TD.TO), Bank of Nova Scotia (BNS.TO), Bank of Montreal (BMO.TO) and Canadian Imperial Bank of Commerce (CM.TO) - will each be affected by the changes.
Correction: A previous version of this story incorrectly stated the new interim rules would be stricter than proposed global rules.