Canada bankers, policymakers warn on rule changes

Thu Apr 22, 2010 4:46pm EDT

* Canada bankers fear reform efforts stalling

* Banks, policy-makers say a levy is not the answer

* Concern about proposed capital, leverage measures

By Andrea Hopkins

TORONTO, April 22 (Reuters) - With global regulators poised to rewrite banking rules, Canada's bankers and policy-makers are warning against proposed changes to capital and leverage requirements, arguing their country's success proves what works best.

In a rare display of solidarity, the heads of Canada's big six banks wrote an opinion piece for the Financial Times newspaper, arguing global decision-makers should take a page from Canada's rule book rather than get bogged down in details that didn't cause the financial crisis in the first place.

"At the risk of sounding parochial, (regulators should) adopt a capital regime similar to the Canadian system," the chief executives of Toronto-Dominion Bank (TD.TO), Royal Bank of Canada (RY.TO), Bank of Nova Scotia (BNS.TO), Bank of Montreal (BMO.TO), Canadian Imperial Bank of Commerce (CM.TO), and National Bank of Canada (NA.TO) said in the article.

While global regulators have said they want to have final changes to banking rules approved by the end of 2010 and implemented by 2012, Canadian banks are frustrated that the talks -- now sidetracked by an IMF call for a global bank tax -- seem to be going nowhere fast.

"If we have a big concern, it's that we see this drifting on and on and nothing happening. So in fact you won't reform the financial system because you won't tackle what the core issues are," TD Chief Executive Ed Clark said in an interview.

Canadian banks have emerged from the financial crisis in good shape relative to global peers, having accepted no bailouts and remaining mostly profitable throughout.

Canadian banks also boast Tier 1 capital levels far in excess of both regulatory minimums and what most global rivals have set aside. But executives have said regulatory uncertainty is preventing them from making acquisitions or raising dividends at a time when they would like to take advantage of the weakness of rivals.

Also on Thursday, Canada's top regulator, Superintendent of Financial Institutions Julie Dickson, said Canada's success during the financial crisis should give it a bigger voice at the discussion table.

"We continue to think that in Canada we had it about right: banks had enough capital to maintain market confidence when the crisis hit, and consequently were able to raise more," Dickson said in a Toronto speech.

In Washington for meetings with his G20 counterparts, Finance Minister Jim Flaherty has spoken out against an IMF proposal for a global levy on banks to cover the cost of future financial sector bailouts -- opposition shared by the bank CEOs and supervisor Dickson.

Canadian stakeholders fear the new focus on a bank tax shifts efforts away from fixing what caused the last crisis and instead tries to sock money away to pay for the next one.

International decision-makers, including the Group of 20 nations, are mulling financial reforms that introduce higher and better-quality capital, minimum liquidity requirements and a cap on leverage. They argue the old rules failed to ensure there was enough capital in the banking system during the crisis, leaving taxpayers to foot bailouts.

In December, the Basel Committee on Banking Supervision unveiled an overhaul of its Basel II rules used by banks to determine how much capital they should set aside to cover risks, but many of the proposals face stiff opposition.

While Canadian players have been careful to agree that changes are needed -- particularly with regards to a level playing field -- they've roundly criticized some of the central proposals involving capital rules and leverage caps.

TD's Clark said he's most concerned that because regulators are trying to change so many things, every country can find something to object to -- building a wall of opposition that threatens to doom the reform altogether.

"We're spending hours and hours and hours debating issues that have nothing to do with the crisis. And the big thing sitting there that everyone can see, we don't want to talk about -- which is how much capital and liquidity should go against the trading books," Clark said in an interview.

Canadian banks are particularly concerned with a proposal to change the way capital levels are measured. The changes, which seek to increase deductions for the value of things like goodwill and deferred tax assets, effectively reduce how much common equity can be counted when capital is calculated.

If implemented, the change could discourage banks from holding some investments, including in minority stakes of other financial institutions.

"So you'd have the scenario where a regulatory change alters strategic decisions that have already been made -- effectively overnight," Barclays Capital analyst John Aiken said. "The problem is we don't know how the levels will change. The uncertainty is the worst possible environment because Canadian banks can't do anything (strategically) for fear of being on the wrong side when changes are eventually made."

(Reporting by Andrea Hopkins)