TD Bank CEO warns against capital "arms race"

Thu Dec 2, 2010 5:12pm EST

* Canada's banks set to meet Basel standards ahead of time

* Rushing ahead of standards could prompt policy response

* Overcapitalization could hurt investor returns

By Cameron French

TORONTO, Dec 2 (Reuters) - Canadian banks should avoid pushing their capital levels too high, or they could run the risk of prompting regulators to make those standards the norm and restricting future growth, the head of Toronto-Dominion Bank said on Thursday.

Banks are facing tougher capital restrictions drawn up by the Basel Committee on Banking Supervision. The tighter rules include a phase-in through 2019, but several Canadian banks have said they can meet the standards much sooner.

The question, said TD CEO Ed Clark, is should they?

"Ultimately, it is not in the best interests of investors to hold all of this excess capital," Clark said on a conference call to discuss the company's third quarter results [ID:nN02201701].

Canadian Imperial Bank of Commerce (CM.TO) officials said earlier on Thursday they could comfortably meet the standards by the end of 2012 without needing the phase-in. National Bank of Canada (NA.TO) officials said on Wednesday it could too.

Clark said TD, Canada's second-biggest bank, could be added to that list.

"The fact that we can meet that test, and we can, doesn't mean we should tell you that we will," he said.

"It would... not be helpful from a public policy perspective if the industry led an arms race to self-imposed guidelines more severe than the current proposed rules."

This would hurt the banks' ability to drive loan growth and make acquisitions, he said.

He added: "There is a real risk that by pushing on this target, the industry will force regulators to adopt this as the new target."

Canada's banks exited the financial crisis in better shape than their U.S. and European counterparts due to the Canadian banks' conservative lending practices and investment restrictions that protect their domestic lending franchises.

Canadian banks did not have to cut dividends or accept bailouts during the crisis.

Now the banks are starting to resume dividend hikes. National Bank raised its quarterly payout on Tuesday, and Clark said TD hopes to provide guidance on the issue early next year. (Reporting by Cameron French; editing by Peter Galloway)

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