Canada's financial watchdog says bank buffers big enough to weather storms
The Office of the Superintendent of Financial Institutions has maintained the additional capital bufferthe country’s biggest banks must hold at 3.5 per cent, a decision that some analysts say will cheer bank investors as an increase was expected.
OSFI last raised the buffer in June by 50 basis points, citing risks including high household and corporate debt levels, the rising cost of debt and increased global uncertainty around fiscal and monetary policy.
The domestic stability buffer was introduced in 2018 as an adjustable tool applied to Canada’s largest banks deemed most important to the stability of the domestic financial system. It requires them to build up capital that can be used to absorb losses and encourage lending in times of stress.
As a result of the decision, Canada’s six largest banks are expected to target a Common Equity Tier 1 ratio of at least 11.5 per cent of risk-weighted assets. All six are currently above 12 per cent.
“OSFI elected to hold the DSB at its current level because Canada’s six largest, or systemically important, banks have each reached a level of reserve capital that is sufficient to absorb losses if current vulnerabilities materialize into actual losses,” OSFI said in a Dec. 8 statement.
Gabriel Dechaine, an analyst at National Bank of Canada, told clients in a Dec. 4 note it was widely expected that OSFI would raise the domestic stability buffer by 50 basis points, which would have compelled the large banks to hold a common equity Tier 1 capital ratio of at least 12 per cent of risk-weighted assets.
“If OSFI surprises, and holds the DSB flat, then we could see bank stocks rally,” Dechaine wrote.
On Dec. 8, the analyst called OSFI’s decision a “relief” but said he expects the banks to
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