RBC added to Financial Stability Board list

TOO BIG TO FAIL

ARMINA LIGAYA

• Royal Bank of Canada is the first Canadian lender to be added to the Financial Stability Board’s list of global systemically important banks, which are deemed too big to fail.

The FSB, which co-ordinates the work of national financial authorities and international standardsetting bodies, added RBC as it removed French bank Groupe BPCE, keeping the total number of institutions on the list at 30.

“This designation reflects the size and scale of RBC’s global operations,” RBC said in a statement Tuesday.

Banks that receive this global systematically important banks (G-SIBs) designation face increased regulatory expectations designed to reduce the likelihood of a failure, and the ripple effects on the global economy. That includes a higher capital buffer and higher supervisory expectations.

RBC, which is Canada’s largest bank by market capitalization, says it was ranked in the lowest G-SIB capital surcharge bucket and that it already meets the requirement of a one per cent capital buffer.

The bank “does not expect any impact to its capital position with this designation,” RBC added.

The Office of the Superintendent of Financial Institutions said in a statement Tuesday that RBC is already subject to its framework for domestically systematically important banks (D-SIBs), and “therefore is well positioned to meet the G-SIB requirements starting in January 2019.”

Canada’s banking regulator in 2013 named the country’s six largest banks, including RBC, as D-SIBs. In turn, the banks were subject to additional requirements such as a capital surcharge, enhanced supervision, and increased disclosure, which OSFI says is generally consistent with the G-SIB requirements.

There are five G-SIB capital surcharge buckets, and RBC is one of 17 financial institutions required to hold an additional one per cent of common equity as a percentage of risk-weighted assets, on top of the requirements outlined by the Basel Committee on Banking Supervision. Eight banks including Goldman Sachs are subject to a 1.5 per cent buffer, and four banks including HSBC must hold 2 per cent. Only JP Morgan Chase must hold a 2.5 per cent buffer, and no bank is in the highest bucket with a 3.5 per cent requirement.

Over the years, there has been “rampant speculation” that RBC would be included in this list and this “should not come as a big surprise to markets,” said Cormark Securities analyst Meny Grauman in a note to clients.

“The question is what does that mean for investors, and in our view the likely answer is not much…. the GSIB buffer will not be additive to its D-SIB buffer, but rather is already included.”