A Look at the Capitalization of Canadian vs. US Banks

This week’s note is for bank regulation policy wonks. These charts show the strength of Canadian Banks' balance sheets alongside their US counterparts. Of particular note is Silicon Valley Bank (SIVB) where you can see how, once adjusting for unrealized losses, their tier 1 equity was effectively wiped out. 

The first quote and chart were taken from NBF’s Bank Analyst in his year ahead outlook. Back in December, Canadian regulators announced they would be further increasing the capital buffer (known as the Common Equity Tier 1 aka CET 1) for big banks by 3% (Article). The Canadian rules were already more stringent than those in the US and all the major Canadian banks were all above the established regulatory minimums (they were even above the new, higher minimums). This further adds to that strength as it is expected they will further strengthen their balance sheets above and beyond the new regulatory minimums.

“However, a recent announcement by OSFI to both raise the Domestic Stability Buffer (DSB) to 3% and the DSB range to 0-4% (from 0-2.5%) has moved the goalposts in terms of target capital ratios. We note that under the expiring DSB of 2.5% that implied a regulatory minimum CET 1 ratio of 10.5%, banks managed to an 11% ratio, reflecting a need to maintain a buffer above the minimum. The new regulatory minimum of 11% would suggest banks moving to an 11.5% target operating level. BMO’s decision to raise ~$3bln of new equity was in response to the DSB increase, with the bank now targeting an operating CET 1 level of 11.5%. However, considering the theoretical minimum of 12% (i.e., at a 4% DSB), banks could be motivated to manage to that level. Currently, only NA has a CET 1 ratio above 12%.”

_{Source: NBF Research - 2023 Canadian Bank Outlook}