Canada’s banking regulator has chosen to leave a key threshold for large banks’ capital reserves unchanged, even as it warned that the country’s financial system still has vulnerabilities and faces uncertainty amid the coronavirus pandemic.
The Office of the Superintendent of Financial Institutions (OSFI) kept its domestic stability buffer constant on Tuesday, in a regularly scheduled update released twice annually. Since mid-March, the buffer has been set at 1 per cent of risk-weighted assets - a measure of the riskiness of loans.
The domestic stability buffer, or DSB, is a cushion of capital that banks are required to build up in good times that can be used in times of financial stress to absorb losses and keep lending to clients when credit would otherwise tighten.
As recently as last December, OSFI was raising the DSB to compel banks to build up their capital levels, and had planned to hike it again on April 30 this year, to 2.25 per cent of risk-weighted assets. But after the pandemic arrived in Canada, as many businesses were forced to shut down because of public health restrictions, OSFI reduced the buffer to 1 per cent on March 13. That released some $300-billion of capital that banks could use as a shock absorber in the crisis.
“OSFI is prepared to respond promptly and release the DSB further if we see signs that risks have re-emerged,” said Jamey Hubbs, an assistant superintendent at OSFI who supervises deposit-taking institutions, on a conference call with reporters on Tuesday. But he said there is “not one single trigger or one single metric” that would prompt the regulator to take that step.
By keeping the buffer at 1 per cent for now, OSFI is signalling that it believes “the current 1-per-cent DSB level remains effective,” Mr. Hubbs said.
The regulator is keeping a close watch on vulnerabilities it sees in the financial sector, which include household and corporate indebtedness, as well as the impact the novel coronavirus continues to have on the economy. Those risks “remain elevated but are currently stable,” Mr. Hubbs said, and not getting worse.
Over recent months, banks have steadily built up their capital levels. That has been possible in part because of restrictions OSFI put in place that temporarily prohibit banks from raising dividend payments or buying back shares.
As of Oct. 31, Canada’s six largest banks had an average common equity Tier 1 (CET1) ratio of 12.2 per cent - the highest on record for a metric that is considered a key measure of a bank’s resilience. Each bank’s ratio is well above the 9-per-cent minimum set by OSFI, and higher than they were before the pandemic.
“This is good news because if the economy does turn for the worse, there is ample capital available for the banking system to be able to continue its shock absorber role,” Mr. Hubbs said.
OSFI gives updates on the domestic stability buffer at least twice each year, in June and December, but can change the threshold at any time. For now, OSFI has promised not to raise the DSB again until at least September next year, to give banks certainty about their available capital with the path to economy recovery from COVID-19 still unclear.
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