Canada's banking regulator, OSFI, has decided to keep the capital buffer for the country's largest banks at 3.5%, indicating confidence in their ability to withstand a potential economic downturn.
Canada ’s banking regulator has maintained the capital cushion that the largest banks must hold, signalling that the country’s biggest banks have enough cash to weather a tougher economy. The Office of the Superintendent of Financial Institutions (OSFI) said Tuesday that the domestic stability buffer (DSB) – a capital reserve that banks must maintain to soften the blow of an economic downturn – will remain at 3.5 per cent of a bank’s risk-weighted assets.
In recent years, the banking regulator boosted the buffer twice, hiking it from 2.5 per cent. The increase forced lenders to hold onto billions of dollars in excess cash, taking a chunk out of profits. OSFI also previously increased the potential range of the buffer to between zero and 4 per cent of a bank’s risk-weighted assets, up from a previous maximum of 2.5 per cent. Some analysts and senior bankers have questioned whether higher capital levels are harming the competitiveness of Canada’s banking sector compared with global peers. Superintendent of Financial Institutions Peter Routledge said Tuesday that any decision to lower the buffer would depend on the economic circumstances, but that OSFI would consider a decrease if a shock to the financial system were to emerge, similar to the economic concerns prompted by COVID-19 pandemic. At that time, OSFI lowered the buffer by 125 basis points to free up capital at the banks to ensure they could continue lending to customers. (A basis point is one-hundredth of a percentage point.) “As you look forward, there is always uncertainty about what you’re encountering,” Mr. Routledge said in response to a reporter’s question. “It would be our view that in that uncertainty, OSFI would have to be decisive about the DSB and consequential. Think of the actions we would take as meaningful and supportive broadly of public confidence. We would not be incremental.” While systemic risks to the financial system are stable, they remain elevated, Mr. Routledge sai
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