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National Bank slapped with unfair handicap

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Tuesday's decision by regulators to designate all of Canada's Bix Six banks as "domestic systematically important banks" represents something of a Canadian compromise. And like many such compromises, it's not fair to everyone.

The Office of the Superintendent of Financial Institutions (OSFI) assigned the "D-SIB" designation to Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada. While the designation implies a closer level of regulatory scrutiny on these banks, the most tangible impact will be on their balance sheets: They will be required to increase their all-important capital ratio to a minimum of 8 per cent of Tier 1 common equity by the beginning of 2016, from the 7 per cent currently required.

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The driving force behind the D-SIB designation has been Bank of Canada boss Mark Carney, who in his role as chairman of the Financial Stability Board, a global banking regulator, made it a priority to establish tighter controls on banks so big that a crisis or failure in them would threaten financial and economic stability.

OSFI's boss, Julie Dickson, has publicly expressed reservations; she felt Canada was doing a fine job with its own regulatory systems, and was concerned that any designation would imply to financial markets that that the banks were considered too big to fail – code in many minds for "banks that governments would bail out."

In the end, the FSB's compromise left national regulators discretion as to which banks they designated as domestically important and what regulatory constraints to place on them. But in deciding to treat the Big Six on equal footing, OSFI may have slapped an unfair label on the smallest of the group, National. Its assets are only about one-fifth that of RBC and TD; unlike the rest of the Big Six, it has almost no international presence.

The new rules recognize Canada's reality. Canada's five biggest banks have combined assets of more than $3.3-trillion – equivalent to almost double the country's annual gross domestic product (GDP). (By comparison, as my colleague Kevin Carmichael pointed out in an article last summer, the five biggest U.S. banks' combined assets are equivalent to only about 60 per cent of U.S. GDP.) Though it doesn't have the size or global advantages of its five bigger competitors, National now faces the same growth-constraining capital burdens – as if it posed the same threat.

Frankly, it doesn't. We know National likes to play with the big boys, but maybe OSFI should have recognized that it's simply not in the same class.

David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @ParkinsonGlobe .

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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