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New rules to bring banks to Canadian standard

U.S. President Barack Obama waves as he stands with Canadian Prime Minister Stephen Harper (L), South African President Jacob Zuma and Russian President Dimitry Medvedev (back R) during a group photo at the G20 Summit in Toronto June 27, 2010.


Canadian banks will just have to go on being the strongest in the world for a little while longer.

The Group of 20 is pushing forward with its plans to implement tougher standards on bank capital, but it will be years before they are in place.

The goal is to ensure "the amount of capital will be significantly higher and the quality of capital will be significantly improved when the new reforms are fully implemented," to enable banks to survive future crises without government support, the G20 said.

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Essentially, the plan is to bring the rest of the world's banks up to the level the Canadians are at, with their strong capital ratios.

G20 Communiqué

Having heaps of capital, as Canada's banks do, was a big competitive advantage during the worst of the crisis. But that's fading. Holding excess capital is expensive, and many senior bankers in Canada would like to see the playing field levelled quickly. Under the G20 plan, that may not happen.

The G-20 is aiming to finalize the plans by November, and to start to hold banks to the new rules starting at the end of 2012.

All that will be welcome in the bank towers of Toronto and Montreal.


However, the leaders are including an out that will let countries with weak and undercapitalized banking systems implement the new standards more slowly, during a phase-in period that regulators said they have yet to determine but that will likely stretch over years.

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"Phase-in arrangements will reflect different national starting points and circumstances, with initial variance around the new standards narrowing over time as countries converge to the new global standard," the G20 said in its final communiqué.

That flexibility is a win for Europe, where many if not most banks simply can't afford to comply fully to the new capital rules any time soon.

However, a long phase-in also heightens risk in the financial system, because banks will remain undercapitalized for more time, and thus vulnerable in crisis.

"That's why we're still in a very dangerous period, because banks are generally very thinly capitalized," said Alex Jurshevski, founder of Toronto-based Recovery Partners, which provides advice on risks and capital to banks and governments.

The issue for Europe is banks there are laden with sour real estate loans and potentially dodgy debt from governments such as Greece. What's more, selling stock to increase capital is not easy in current markets.

"That's why you're getting push back from the Europeans," he said. "There's huge, huge exposures out there."

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As for the U.S., most of its banks don't have to comply with the international capital rules, either because they are too small or they are allowed to opt out, he said.

The plan is to give a long enough transition period so banks can earn their way to higher capital levels, supplemented with "modest" share sales, said Svein Andresen, the secretary general of the Financial Stability Board, the umbrella group for the world's financial regulators that is steering much of the process around reform of the banking sector.

In the meantime, Canadian bankers are pushing to ensure the long phase in doesn't leave them at a disadvantage.

Julie Dickson, Canada's top banking regulator, has committed to the bankers she oversees that the playing field would be level throughout the phase-in.

"Ottawa is fully aware of the level playing field issue and ultimately will not put Canadian banks at a disadvantage," said a senior Canadian banker.

At the very least, under the timetable presented by lawmakers, the rules on capital should be largely set down by the end of the year in time for the next G20 meeting in Korea.

That will enable Canadian banks to get on with business that they have had to put on hold while waiting for a final ruling on just how much capital they have to hold.

They will be able to move on with decisions on loans, acquisitions and dividend increases that have been impossible before seeing the new rules.

If flexibility for weak competitors in Europe is the price of that, many bank executives are willing to accept it.

"There are national interests that can be adjusted for in the terms and timing of implementation without undermining the integrity of the agreement," said Bill Downe, chief executive officer of Bank of Montreal.

With files from Grant Robertson

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