OSFI hikes domestic stability buffer for Canada's big banks
The Office of the Superintendent of Financial Institutions has raised the additional capital buffer the country’s biggest banks must maintain by 50 basis points to 3.5 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 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.
In December 2022, OSFI raised the domestic stability buffer (DSB) to three per cent from 2.5 per cent, and raised the cap to four per cent, reasoning that high household indebtedness and the rapid rise in interest rates had increased risks.
The latest increase in the DSB, which is effective Nov. 1, will ensure Canada’s six largest banks keep their so-called tier one capital buffer at 11.5 per cent, up from 11 per cent, a level the largest banks already exceed, said Peter Routledge, OSFI’s superintendent.
On a call with media on the morning of June 20, Routledge said OSFI’s latest move buys more insurance for stability at an “opportune time” and the regulator won’t hesitate to raise the buffer again — or lower it — if circumstances warrant.
“By raising the DSB to 3.5 per cent, we are taking action to enhance the resilience of Canada’s largest banks against vulnerabilities,” he said in a statement. “This change will help Canada maintain a resilient financial system. The DSB is a safety buffer for the banking system that can be lowered when appropriate, such as during economic downturns.”
Routledge noted
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