03/27/2013 01:46 EDT | Updated 05/27/2013 05:12 EDT

National Bank 'comfortable' being part of Big 6 banks designated too big to fail

MONTREAL - National Bank is "comfortable" with being grouped as one of Canada's six strategically important banks and meeting the higher capital requirements that accompany the designation, its CEO said Wednesday.

Louis Vachon said the decision by regulators doesn't change much at the Quebec bank, since it would have been held to the same standards as its five larger rivals.

"Frankly, I'd rather be officially in than having the same standards and not being... officially (part) of the club," he told the National Bank financial services conference.

On Tuesday, the federal financial supervisor declared that Canada's six largest banks were too big to fail and needed to be subjected to stricter supervision than their smaller peers.

The Office of the Superintendent of Financial Institutions said the "systematically important" designation stems from a framework issued by the Basel committee on banking oversight in October that set out guidelines for assessing domestic financial institutions.

Under the new OSFI requirement, the Bank of Montreal (TSX:BMO), Bank of Nova Scotia (TSX:BNS), Canadian Imperial Bank of Commerce (TSX:CM), National Bank of Canada (TSX:NA), Royal Bank of Canada (TSX:RY) and Toronto-Dominion Bank (TSX:TD) will be required to carry a larger capital buffer than other banks.

Their Tier 1 capital ratio will have to be at least eight per cent as of Jan. 1, 2016, as compared with seven per cent for less important financial institutions.

The OSFI changes are also designed to make Canada's leading banks more bullet proof in the event of a financial crisis.

Two credit ratings agencies have downgraded the Canadian banking system, but Standard & Poor's rating for the National Bank suggested two Toronto banks on the list had a much higher probability of being bailed out during a crisis.

Vachon called the designation a "binary decision."

"Either you are or you're not and I think the decision yesterday of the government is that we were and we would expect ratings agencies — all three or four of them — to take note of that fact."

Meanwhile, Vachon called the recent mortgage pricing wars, in which at least one rival temporarily offered a five-year mortgage at 2.99 per cent, tame and more localized than last year.

"At the end of the day it's not undercutting price that will determine the winners and losers in the mortgage market," he said. "It will be the quality of the customer experience, efficiency and a lot of that is tied to retraining your sales forces and deploying new technology."

Laurentian Bank (TSX:LB) chief executive Rejean Robitaille told the conference that it consciously decided not to chase volumes by following competitors who offered mortgages at rates similar to what it paid for five-year GICs.

"I don't have a Harvard degree," said Robitaille. "I'm just a humble chartered accountant, but you can't make a lot of money on this but you can have lots of potential new volumes."

Robitaille added he expects a "soft landing" in the Canadian real estate market rather than a dramatic downfall.

"We think we have a very sound portfolio and we do not expect a dramatic downside on the housing market side. We expect a soft landing, we expect maybe prices to go a little bit lower."

He said the bank has protected itself from risk by limiting financing of development projects to $30 million and requiring high levels of pre-sales and deposits.

Meanwhile, TD Bank told the conference its wealth management and insurance businesses are performing well but do face several risks, including the possibility that the minority Ontario government will decrease auto insurance rates at the behest of the NDP.

"There are some underlining factors in auto insurance in Ontario that are driving prices up high, such as fraud and it's those things we need to attack and hopefully whatever they do, (they) phase it in over an appropriate period of time," group head Mike Pedersen said.

Pedersen said TD prefers to grow its insurance business organically but doesn't foresee the federal government allowing banks to sell the product in their branches, even if there is a change of party in power.

"I think the chances of that are extremely small and it's probably more accurate to say not a snowball's chance in hell," he said.

Earlier, CIBC's chief financial officer said the bank wants to expand its wealth management business particularly in the United States rather than embark on a broader "transformational" acquisition.

Kevin Glass said the bank would like the sector's contribution to reach 15 per cent of overall earnings, up from the current level of 10 per cent achieved in 2012.

He said the Toronto-based bank would be comfortable with a deal valued up to $800 million and that looking to the U.S. makes sense.

"It fits that strategic sweet spot more closely and there is also an enormous amount of opportunities," said Glass.