Big 6 banks in Canada deemed “too big to fail”

Canada banks - Keith Thomson, CFP, CIM, FCSIFederal regulators have recent deemed Canada’s largest banks “too big to be allowed to fail for the country,” according to a recent article by The Canadian Press.

The classification was given based on a framework from the Basel committee on banking oversight, which guides the assessment of Canada’s financial institutions, reported the Office of the Superintendent of Financial Institutions (OFSI).

As a result of the “too big to fail” designation, the banks will experience greater supervision and capital requirements. Requirements from the OFSI mandate that these banks must have more assets in reserve to guard against any future rush to withdraw deposits. A common equity tier 1 ratio of eight percent will be required by January of 2016, in contrast to the seven percent required for smaller banks and financial institutions.

These mandates were put in place to reduce the possibility that one of the most important banks would fail and subsequently harm the Canadian economy. The banks affected, the Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank, make up more than 90 percent of all banking assets in the country. The OSFI stated that the banks are vital to our economy because of their “size, interconnectedness, substitutability, and flexibility.”

John Aiken, an analyst for Barclays Capital, noted that markets expected this designation and that the valuations of the banks will likely remain unaffected. With three years to make the transition, the banks should not be unduly burdened.

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Keith N. Thomson

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