New capital rules will be costly for Canadian banks and economy, says analyst
New capital rules for Canada’s largest banks are expected to come with a raft of business and economic costs, potentially crimping lending and putting the banks on unequal footing with counterparts in the United States and Europe, according to a veteran analyst.
In a report published late Tuesday, National Bank Financial analyst Gabriel Dechaine told clients that the phased-in Basel rules introduced in 2023, which affect the way banks calculate risk-weighted asset ratios, will begin to have an impact on most of Canada’s big banks as full implementation in early 2026 approaches.
It will affect the calculation of risk-weighted assets by shifting away from sole reliance on a measure that has been criticized for not reflecting the risks inherent in loan books. In the process, there will be hits to the banks’ closely watched common equity tier one (CET 1) capital ratios.
The new Basel rule, called the output floor, will impose “greater conservatism on banks…conservatism that comes at a cost,” Dechaine wrote, adding that the lower CET 1 will mean less return on equity for the banks.
For perspective, he applied the full impact to the balance sheets of the Big Six banks in the second quarter of fiscal 2024 and estimated an additional $80 billion of risk-weighted assets alongside a 45-to-50-basis-point hit to bank CET 1 ratios (with the exception of Toronto-Dominion Bank, for which there was no impact.)
“For additional perspective, that amount of RWAs (risk-weighted assets) would equate to the eighth largest bank in Canada,” Dechaine wrote, adding that the costs of the new rules would extend beyond return on equity for the banks.
Some banks have already begun to shed certain loans outright or curbed lending, Dechaine wrote,
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