Canada’s chief banking regulator ready to further ease capital requirements if lending tightens

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The head of Canada’s banking regulator says he’s prepared to further reduce minimum capital requirements for banks if the economic fallout of novel coronavirus chews into capital reserves and challenges banks’ capacity to keep lending through the crisis.

Canadian lenders will be under pressure in the coming months as soaring loan losses and demand for credit squeeze the cushions of capital that banks are required to maintain. In response, the Office of the Superintendent of Financial Institutions will make additional cuts to the domestic stability buffer as required, OSFI superintendent Jeremy Rudin said in an interview on Friday.

He did not give any indication as to whether OSFI will also ask banks to cut dividends. British and European regulators urged banks to stop payments to investors this week, and on Wednesday the U.K.’s largest banks said they were halting dividend payments.

When asked if OSFI would follow suit, Mr. Rudin noted the relative strength of Canadian bank capital levels and said that OSFI is taking an incremental approach in response to the crisis. OSFI has already asked banks not to raise dividends or to buy back shares.

“We’ll stand ready to release some or all of the rest of [the domestic stability buffer], and that’s plan B. If and when we have to roll out plan B, by then, for sure we’ll know what plan C is," Mr. Rudin said.

OSFI already cut the domestic stability buffer – which is built up during periods of economic strength, to be released in a downturn – by 1.25 percentage points, from 2.25 per cent to 1 per cent, freeing up an estimated $300-billion worth of lending capacity at the Big Six banks.

“This is an extraordinary situation, and things are happening at an extraordinary pace. I don’t know if we will be obliged to make another decision about the domestic stability buffer, and I certainly don’t know when. All I know is we stand ready to do it,” he said.

Mr. Rudin’s comments followed a statement OSFI put out on Friday reassuring Canadians of the soundness of the country’s financial system.

“We want people to know that the financial system and the stability of that system is one less thing to worry about. Our financial system is well-capitalized, it’s very resilient, it’s well-prepared for what we’re about to go through," Mr. Rudin said.

Canadian banks fared relatively well during the last financial crisis, and kept dividends intact through 2008 and 2009. Canadian banks’ more conservative approach to capital requirements and risk management puts them on a solid footing compared to their British or European counterparts, several bank analysts noted this week.

“The Canadian banks’ capital position remains quite strong,” wrote Barclays analyst John Aiken in a note on Wednesday. “Should the situation become dire, we believe that the banks would consider raising capital before cutting the dividend, similar to what occurred with the group in 2008.”

Mr. Rudin did warn, however, that the path to economic recovery will be long, and the regulatory response needed to get through coming months and years remains uncertain.

“I think it’s clear that the transition to the new normal, whatever it’s going to be, is going to have to be gradual, not abrupt. What exactly we’ll need to do at that time will depend on where we’ve gotten to, and there’s a sense in which we’re just getting started,” Mr. Rudin said.