The Office of the Superintendent of Financial Institutions (OSFI) in Canada announced on Tuesday that it would raise the stability buffer for the country's major banks by 50 basis points to 3.5%. The decision, set to take effect on November 1, was made in response to increasing borrowing costs, high levels of debt, and pressures on the financial system.
In its statement, the OSFI expressed concerns about elevated household and corporate debt levels, the escalating cost of borrowing, and heightened global uncertainty surrounding fiscal and monetary policies. With the financial sector demonstrating resilience in recent quarters, the OSFI deemed it an opportune time to take action.
Superintendent of Financial Institutions Peter Routledge stated, "We are implementing measures to strengthen the resilience of Canada's largest banks against vulnerabilities." The regulator's action comes amid growing concerns about the ability of Canadians to manage their debts, with rising worries about potential increases in delinquency rates for mortgage payments.
Anticipating economic challenges and consumers' struggles to make payments, major banks have already allocated additional funds.
According to Desjardins analyst Royce Mendes, the purpose of the higher buffer is to provide extra capital as a safeguard for future uncertainties.
The cautious approach taken by both regulators and the regulated institutions is expected to enhance global investors' confidence in the stability of the Canadian financial system.
The stability buffer, established in 2018 to bolster banks' capital resilience against vulnerabilities, is reviewed semiannually but can be adjusted at other times.
The common equity tier 1 ratio for Canada's top six banks will now rise to 11.5%, up from 11%. This ratio compares a bank's capital with its risk-weighted assets and measures its ability to withstand economic downturns.
As of the end of the first quarter, the ratio for the six largest banks ranged between 11.9% and 15.3%, with most banks targeting a 12% ratio by the end of 2023.
This marks the second consecutive increase in the size of the buffer by the OSFI. In December of the previous year, it raised the buffer by 50 basis points to 3.0%. The buffer had been lowered during the pandemic but has been raised in the past two years.
