UPDATE 1-Canada regulator urges caution on bank buybacks

Wed Nov 18, 2009 4:00pm EST

* OSFI head urges "continued conservatism" on capital

* Economy, rule changes suggest moderate approach

* Canadian banks in good position if rules change (Adds comment on supervision, global rules)

By Andrea Hopkins

TORONTO, Nov 18 (Reuters) - Canada's top banking supervisor said on Wednesday the country's top lenders should continue to take a conservative approach to capital levels before contemplating any share buybacks.

Julie Dickson said Canada's big banks have long been required to get approval from her department, the Office of the Superintendent of Financial Institutions (OSFI), before a share buyback. And, she says, she has continued to urge them to keep in mind that capital levels may be changing under global regulatory reform.

"I think that, in the environment in which we are living right now, institutions are aware that capital requirements are being discussed internationally and there are going to be some changes," Dickson told reporters in response to a question about whether share buybacks were on the table at the banks.

"As well, the environment is still a bit uncertain and we all know that loan losses lag the economy. So these are all things we've put in front of institutions and that suggests continued conservatism in that regard," Dickson said.

Dickson spoke to reporters after giving a speech to capital market players in Toronto.

Canada's big five banks are among the best capitalized in the world and built capital levels through the financial crisis by issuing shares or debt earlier this year.

With the crisis easing, speculation has risen that banks may soon increase their dividends, repurchase shares or deploy capital through acquisitions in a bid to put that capital to work or return it to shareholders.

Dickson also told reporters that Canadian banks were in a solid position as global regulators discussed amending capital or leverage rules, since they entered the crisis with strong balance sheets and a cautious approach to capital levels.

"I do think because Canadian banks started from a very solid position, they will have less far to go than some other banks. But I also think there are a lot of things on the table right now and it's too early to say where we'll end up."

None of the five big 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) -- have begun to decrease their Tier I capital levels, which are all well above the regulator's minimum target of 7 percent.

Dickson said Canada was taking a leading role in global discussions about optimal capital and leverage ratios because its banks are seen as a success story, emerging from the crisis untouched by bankruptcies or bailouts.

"Our capital rules are seen to have been good going into the crisis, so people are very interested in our target levels of 7 and 10 percent -- 7 percent Tier 1, 10 percent total," Dickson said.

"People are very interested in the way we approached quality of capital going into this crisis, with a guideline that 75 percent of Tier I had to be common shares. So those are all things I see other regulators gravitating toward."

Dickson reiterated her concern with some of the regulatory proposals being put forward in international discussions, including the suggestion that some banks be declared systemically important -- so big that their failure could hurt the economy -- and then charged a capital surtax.

But she declined to say whether Canada would "opt out" of any rules it disagrees with, saying it was too early to conclude what form the final regulations would take.

In her speech, Dickson urged improvements to supervision by regulators, rather than more rules or an incursion by regulators into matters that have traditionally been considered the responsibility of management.

"We do a lot now, but we don't think we're crossing the line into management," Dickson said, contrasting Canada's approach to that in Britain, where regulators have become involved in the hiring decisions of senior bank personnel. (Reporting by Andrea Hopkins; editing by Rob Wilson)

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