OSFI keeps big banks’ domestic stability buffer unchanged

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Canada’s top banking regulator held the domestic stability buffer at 3.5 per cent Tuesday following a semi-annual review of the ‘rainy day’ funds the country’s largest banks must set aside to help absorb losses and to keep loans flowing in the event of financial shocks or uncertainties.

Since 2022, the buffer could be ratcheted up to as much as four per cent and the Office of the Superintendent of Financial Institutions (OSFI) has said the aim is to build up a larger cushion in good times to help protect the banks and economy in times of uncertainty.

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“Holding the DSB at its current level reflects OSFI’s assessment that vulnerabilities, such as high household debt, remain elevated but stable, while near-term risks continue to be low despite some recent increase,” the regulator said in a statement Tuesday. “Future mortgage renewals at higher interest rates remain a concern, while commercial real estate lending and geopolitical conflicts continue to contribute to economic uncertainty.”

OSFI introduced the added cushion in June 2018 for banks deemed domestically systematically important and it is a component of their closely watched common equity Tier 1 (CET1) capital requirements. It is intended to help keep Canada’s economy running in times of stress and to ensure large Canadian banks don’t fall into financial distress or failure, which could have an impact on the global financial system.

Last December, OSFI held the buffer at 3.5 per cent, surprising analysts who had expected a 50 basis point increase to the top of the range. But OSFI superintendent Peter Routledge said at the time that there was enough insurance built up within the nation’s banking system to handle a severe yet plausible downside scenario.

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In June of 2023, OSFI had raised the buffer to 3.5 per cent from three per cent, citing risks including high household and corporate debt levels, the rising cost of debt and increased global uncertainty around fiscal and monetary policy. The regulator determines the buffer based on financial trends, risks and key vulnerabilities, including potential for recession, a decline in house prices and geopolitical unrest.

OSFI doesn’t have to wait for the twice-yearly review to adjust the domestic stability buffer. In response to the economic impact when COVID-19 was declared a global pandemic in March 2020, OSFI reduced the buffer to one per cent from 2.25 per cent.

Canada’s banks have traditionally held more capital than required by the regulator. For instance, late last year when the total CET1 requirement, including the 3.5 per cent domestic stability buffer, was 11.5 per cent, the big banks’ ratios were higher than 13 per cent.

OSFI said Tuesday that all six of the large banks subject to the domestic stability buffer still have CET1 ratios exceeding 12 per cent. The Common Equity Tier 1 ratio is a measurement of a bank’s equity compared with its total exposures weighted by risk.

• Email: bshecter@postmedia.com

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