TORONTO – Canada’s banking regulator says it will require the domestic industry to adopt a new leverage standard soon to be used by other banks around the world.
Starting next year, the Office of the Superintendent of Financial Institutions will begin following a leverage ratio created by the Basel committee on banking oversight.
Under the Basel III leverage ratio, a Canadian bank will be required to have capital that is at least three per cent of its total assets — which is down from a longtime practice of five per cent.
The new calculation, however, is “more complex” than the asset-capital multiple (ACM) used by Canada’s banking industry for more than two decades, said OSFI deputy superintendent Mark Zelmer.
The Basel III standard is “designed to look through differences in accounting rules across jurisdictions so that bank leverage data can be compared on an ‘apples to apples’ basis across banks,” he said in prepared remarks presented at a Toronto banking conference on Tuesday.
The OSFI has a long-standing assets-to-capital requirement that meant Canadian banks could not hold assets that exceeded 20 times their capital reserves — or five per cent.
New requirements in the Basel III calculation are more strict for banks and include more off balance sheet derivatives and a narrower definition of capital, which holds it to a higher standard of Tier 1 capital, Zelmer said.
But Canada does not plan to follow the United States, which is in the process of laying out a stricter leverage ratio that exceeds the Basel standard.
“(We) will continue to set more stringent requirements on an institution-by-institution basis as circumstances warrant,” Zelmer said.
Canadian banks will be required to follow the international standards beginning in January 2015, he said. Details on the new leverage guideline will be released later this year.
The Basel committee created the Basel III standards in response to the recent global financial crisis. The intention of the voluntary regulations is to set a standard on key measures of a bank’s health and its ability to endure future economic downturns.
Canadian banks have been widely considered a model for international banks because they weathered the global recession better than others.