A leverage ratio is a financial measurement that assesses how much capital comes in the form of debt (loans) compared to other sources. There are several important types of leverage ratios:
1. Financial Leverage (Debt-to-Equity Ratio):
2. Assets-to-Equity Ratio:
3. Banking/Regulatory Leverage:
4. Operating Leverage:
Key considerations when analyzing leverage:
Excessive leverage can lead to:
Banking leverage refers to the relationship between a bank's core capital and its total assets. In simple terms, it's how much a bank can "stretch" its capital to support its assets (mainly loans). A higher leverage means the bank uses more borrowed money than its own capital.
Leverage Ratio | ... | Q2 2020 | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
RBC | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 4.3% | 4.4% | 4.2% | 4.2% | 4.2% |
TD | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 4.4% | 4.4% | 4.3% | 4.1% | 4.2% |
BMO | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 4.2% | 4.2% | 4.3% | 4.3% | 4.4% |
Scotiabank | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 4.2% | 4.3% | 4.4% | 4.5% | 4.4% |
CIBC | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 4.2% | 4.3% | 4.3% | 4.3% | 4.3% |
National Bank | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 4.4% | 4.3% | 4.4% | 4.4% | 4.4% |
For Canadian banks, leverage is primarily regulated through two key metrics:
1. The Leverage Ratio (LR)
Calculated as:
Leverage ratio = Capital Measure/Exposure Measure,
In other words: Leverage Ratio = Tier 1 Capital / Total Exposure
2. The Risk-Based Capital Ratios also set by OSFI
OSFI has divided Canadian depository institutions into domestic systematically important banks (D-SIBs) and small and medium-sized banks (SMSBs). D-SIBs include Canada’s big six banks, and all others are considered SMSBs. The dividing line is $100 B in total assets. Calculating risk-weighted assets (RWA) is quite complicated, especially when it comes to market risk, which differs between D-SIBs and SMSBs.
CET1 Capital Ratio | ... | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
RBC | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 12.8% | 13% | 13.2% | 13.2% | 13.2% |
TD | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 13.4% | 12.8% | 13.1% | 13.9% | 13.4% |
BMO | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 13.6% | 13% | 13.6% | 13.1% | 13.6% |
Scotiabank | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 12.9% | 13.2% | 13.2% | 13.2% | 13.2% |
CIBC | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 13.1% | 13.3% | 13.3% | 13.3% | 13.3% |
National Bank | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 13.2% | 13.5% | 13.7% | 13.7% | 13.5% |
Canadian banks are known for being more conservatively leveraged than many international peers, which helped them weather the 2008 financial crisis better than banks in other countries. The Office of the Superintendent of Financial Institutions (OSFI) typically requires Canadian banks to maintain higher capital levels than the international minimums set by Basel III requirements.
Some distinguishing features of Canadian bank leverage regulation:
Tier 1 Capital Ratio | ... | Q3 2020 | Q4 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
RBC | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 15.7% | 16.3% | 14.1% | 14.5% | 14.5% |
TD | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 16.2% | 15.7% | 15.1% | 14.6% | 14.8% |
Scotiabank | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 14.1% | 14.6% | 14.8% | 14.8% | 15.2% |
CIBC | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 14.8% | 14.8% | 14.7% | 14.8% | 14.8% |
National Bank | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 1.11 | 15.7% | 15.9% | 15.7% | 15.9% | 15.9% |
TLAC stands for Total Loss-Absorbing Capacity. It's an international standard developed by the Financial Stability Board (FSB) after the 2008 financial crisis to ensure that global systemically important banks (G-SIBs) have enough capital and debt that can be converted to equity in case of a crisis.
For Canadian banks that are designated as D-SIBs (Domestic Systemically Important Banks), they must maintain minimum TLAC ratios as required by OSFI:
TLAC includes:
The purpose is to ensure that if a major bank fails, it can be recapitalized through the conversion of TLAC instruments into equity without using taxpayer money for bailouts or disrupting critical banking services.
TLCA stands for Trust and Loan Companies Act. This Canadian federal statute regulates trust companies and loan companies under federal jurisdiction. The Act provides the legal framework for the incorporation, operation, and supervision of trust and loan companies in Canada.
The TLCA is one of several key pieces of legislation that OSFI uses to regulate financial institutions in Canada, along with:
Disclaimer: