RBC joins list of banks deemed 'too big to fail'

The Royal Bank of Canada sign is seen at its former head office in downtown Toronto, Dec. 2, 2011. (Nathan Denette / THE CANADIAN PRESS)

TORONTO -- The 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 standard-setting bodies, added RBC (TSX:RY) 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 (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 is Canada's largest bank based on its stock market value. However, because it is one of the smallest banks on the global list, RBC was placed into the lowest of five categories or "buckets" with the least onerous requirements to set aside additional capital to protect against unexpected losses.

RBC and 16 other banks in this G-SIB category are required to hold an additional one per cent of common equity as a percentage of its risk-weighted assets, on top of the minimum capital levels outlined by the Basel Committee on Banking Supervision.

RBC says that it already meets the requirement of a one per cent capital buffer and "does not expect any impact to its capital position with this designation."

Eight banks, including Goldman Sachs, are subject to a 1.5 per cent buffer, and four banks including HSBC must hold two 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.

The Office of the Superintendent of Financial Institutions said in a statement Tuesday that RBC is already subject to its framework for domestic 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.

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," Cormark Securities analyst Meny Grauman said 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 G-SIB buffer will not be additive to its D-SIB buffer, but rather is already included."

CIBC World Markets analyst Robert Sedran said RBC's possible inclusion had often been discussed at the time of FSB's annual update "as the combination of currency translation and business growth made it a close call each time the list was released."

"It is not a stretch to suggest this bank has always been systemically important to the global financial system (at least a little)," Sedran said in a note to clients.

"More important to us is the fact that management (in its language), the Board (as evidenced by the buyback activity) and the regulator (with its formal pronouncements) are comfortable that the domestic buffer can absorb the first level of the required global buffer and that the capital position is strong."

Sedran added that the lasting impact of the announcement on shares should be limited.

Shares of RBC were flat, closing at $100.92 in Toronto.