The Royal Bank of Canada has been added to a list of 30 of the world's most systemically important banks.
The designation, by the Swiss-based Financial Stability Board, means that Canada's largest lender is big enough and important enough to have a major impact on the global financial system, but the downside is that the bank is now held to a higher standard than other banks in terms of how much capital it must keep on hand to ensure its own stability.
The FSB puts the world's top 30 banks into five pools of globally systemically important banks (or G-SIBs.) Those at the top, known as category five, must hold an additional 3.5 per cent of capital on hand, in addition to the requirements placed on all banks. The next group, four, must keep 2.5 per cent on hand. Category threes are required to keep two per cent, category twos at 1.5 per cent, and category ones, one per cent.
Royal Bank was named a category one bank on this year's list, the first Canadian bank to ever be so designated. The lender says it already meets those higher capital requirements, although it will not be required to do so for another 14 months, in 2019.
"This designation reflects the size and scale of RBC's global operations," the bank said in a statement.
While the designation may seem like a feather in the bank's cap, it actually ties their hands in a number of ways.
"The main issues with being labelled a G-SIB is regulatory scrutiny and the cost of disclosure and reporting generally," TD Bank analyst Mario Mendonca said of the news. "We suspect that [the] classification would require a noticeable increase in back-office staffing."
Royal Bank shares moved up slightly on the TSX on Tuesday, gaining 41 cents to $101.42.
Royal replaced French lender Groupe BPCE on the list, keeping it at 30 overall.
Overall, no banks are currently deemed to be category five banks, and U.S. lender J.P. Morgan Chase stands alone in category four, as the world's most systemically important bank.
Bank of America, Citibank, Deutsche Bank and HSBC are deemed category threes. Eight banks are deemed category twos, and then 16 more besides Royal Bank are category ones.