When the final post-financial crisis capital rules are fully implemented, the Big Six banks should see their capital requirements decline slightly, says Fitch Ratings.
In a new report analyzing the effects of the final Basel III rules on the big Canadian banks, the rating agency found that the banks’ capital requirements should decline by an average 3%, primarily due to the treatment of credit risk for risk-weighted assets (RWAs) under the revised rules.
The new framework for operational risk could also result in lower capital demands for specific banks, Fitch noted.
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“An excellent operational loss history could drive a significant decline in operational risk RWAs, and Canadian banks were generally not subject to high fines in the years following the great financial crisis,” it said.
“However, this may be mitigated by increased market risk requirements from fiscal 2024,” it added.
With the banks’ capital requirements initially expected to decline on average, their capital ratios will increase, the report noted. From a ratings perspective, the full implementation of the Basel III rules is expected to be neutral overall.
“The final rules arrive at a time of relatively high capital cushion compared to minimum requirements at the largest banks, although recently announced M&As will reduce this margin,” it noted.
Fitch also pointed out that Canada will be one of the few countries to implement the final Basel III rules on schedule — along with Australia, Japan and Singapore.
It noted that regulatory capital requirements, credit risk, operational risk and counterparty credit risk guidelines are set to take effect in the fiscal second quarter of 2023, (starting Feb. 1, 2023 for the six big banks). New rules for market risk and credit valuation adjustment risk will take effect in the fiscal first quarter of 2024.
“In contrast, the European Commission proposed a two-year delay for implementing the standards from Jan. 1, 2025 in the EU and initial drafts are still expected from the U.S., the U.K. and Switzerland,” Fitch said.