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Royal Bank of Canada called 'too big to fail'

Royal Bank of Canada (RY-T) shares could be pressured if the bank is labeled "too big to fail," as a media report suggested Wednesday, but analysts says it is unlikely that RBC would ultimately be at a disadvantage versus its domestic rivals.     

 

Britain's Financial Times newspaper said global financial authorities have included RBC on a list of 20 banks deemed too big to fail, citing sources familiar with the agenda for the G20 meetings in Seoul this week.

   

This could mean the bank would be subject to stiffer capital requirements as the survival of those biggest banks is seen as key to the health of the global financial industry.

   

Royal, Canada's biggest bank, has extensive international operations and has been pushing recently to expand its wealth management and wholesale banking operations in Europe.

   

Any restrictions on its capital requirements above and beyond its domestic rivals would likely hurt its share price, and RBC's stock was down slightly relative to its peers Wednesday. However, analysts said it is unlikely the bank would be at a long-term disadvantage.

   

"We believe that the incremental challenge to RBC is not as great as some might initially conclude," Brad Smith, an analyst at Stonecap Securities, said in a note.

   

He said that regulators are also considering a separate list of banks that would be seen a too big to fail for their domestic markets. For Canada, that would likely involve all of the "big five" banks, and that would mute any disadvantage to Royal, he said.

   

Other analysts have suggested that Canada's banking regulator would likely act to level the domestic playing field if RBC were singled out.

   

Superintendent of Financial Institutions Julie Dickson said two weeks ago that she does not believe any Canadian bank should considered too big to fail on a global basis.

   

Gord Nixon, Chief Executive of RBC, has said the bank should not be singled out from its domestic peers, while

Finance Minister Jim Flaherty told the Globe and Mail newspaper on Wednesday he's "not a big fan" of the "too big to fail" label.

   

The higher capital requirements of a "too big to fail" designation would come on top of stiffer rules already set to be finalized at the G20 meeting. The new regulations are meant to guard against a repeat of the financial crisis.

   

Canada's big banks, which have traditionally held elevated capital levels compared with their international rivals, have said they can adopt the new rules with little disruption.

   

A spokeswoman for Royal Bank would not comment on the Financial Times report.

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