Canada’s Largest Six Banks Designated as Systemically Important by OSFI

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In conjunction with A framework for dealing with domestic systemically important banks issued by the Basel Committee on Banking Supervision (BCBS), the Office of the Superintendent of Financial Institutions Canada (OSFI) has issued an Advisory, “Domestic Systemic Importance and Capital Targets – DTIs.” The Advisory identifies each of Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada as systemically important banks in Canada.

As indicated in the BCBS framework, a bank’s systemic importance is related to the impact that its failure could have on the domestic economy. The criteria applied by OSFI in determining a bank’s systemic importance included the following:

  • Size – The six banks identified as systemically important account for over 90% of total Canadian banking assets;
  • Inter-connectedness – The six identified banks have, by far, the highest level of claims against, and obligations to, other financial institutions. Those ties or “inter-connections” between institutions may increase the risk of problems spreading through the financial system; and
  • Substitutability – The six identified banks are also the dominant participants in financial markets and systems such as underwriting, large value transfers, foreign exchange and clearing and settlement systems for payments and securities transactions. This makes each bank more difficult to replace as a participant in the event of any failure.

The ramifications of being identified a systemically important bank include:

  • A risk-weighted capital ratio requirement equal to a 1% common equity surcharge commencing January 1, 2016;
  • Continuation of an enhanced level of supervisory intensity as reflected in OSFI’s Supervisory Framework; and
  • Enhanced disclosure requirements including those recommended by the Financial Stability Board’s Enhanced Disclosure Task Force.

OSFI will continue to review matters covered by the Advisory and make any required updates, including to the list of systemically important banks and the related equity surcharge level.