OSFI holds domestic stability buffer steady as banks beat expectations

A key reason OSFI is holding the buffer at current levels is that the banks are performing better than expected. Photo by PostmediaArticle contentCanada’s top banking regulator held the domestic stability buffer (DSB) at 3.5 per cent on Thursday after a review of the “rainy day” funds that the country’s largest banks must keep aside to absorb unexpected financial shocks.Sign In or Create an AccountEmail AddressContinueor View more offersArticle contentThe Office of the Superintendent of Financial Institutions (OSFI) said “major vulnerabilities” in the banking system remain elevated, but are stable.Article contentWe apologize, but this video has failed to load.Try refreshing your browser, ortap here to see other videos from our team.Article contentArticle content“Today, Canada’s six largest banks hold capital levels well above supervisory expectations,” Peter Routledge, the superintendent of financial institutions, said in a statement. “This enables them to provide core banking services to the Canadian economy throughout the business cycle.”Article contentPosthasteBreaking business news, incisive views, must-reads and market signals. Weekdays by 9 a.m.There was an error, please provide a valid email address.Sign UpBy signing up you consent to receive the above newsletter from Postmedia Network Inc.Thanks for signing up!A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Posthaste will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.Article contentOSFI requires the Big Six lenders to maintain a capital buffer so they can continue lending to households and businesses during periods of financial stress. The DSB is measured as a percentage of the banks’ risk-weighted assets, such as mortgages or credit card loans.Article contentIn recent months, Routledge has said the Big Six can help fund Ottawa’s objective to change Canada’s economic model by relying less on the United States and speeding up the building of mines and energy-related projects since they have built up substantial capital cushions.Article contentOn Nov. 20, OSFI proposed new rules that could allow banks to free up more capital for lending to the real estate market and small and medium-sized businesses. Those rules are now in a 90-day public consultation period.Article contentA week later Routledge said he was open to further “experiments” aimed at strengthening the economy.Article contentArticle content“We’re not done,” he said then. “This is an annual — maybe even ‘annual’ is too long a periodicity — this is just a regular discipline. What experiments can we make to help the financial system finance this shift in the economy?”Article contentRead More TD, BMO and CIBC beat analysts' estimates despite uncertain economy The Big Six are riding the right side of the K-shaped economy, but can it last? Article contentBut a key reason for holding the DSB at current levels is that the economy and the banks are performing better than expected.Article contentCanada’s big banks also have a higher-than-required cushion, which gives them “ample capacity to continue to grow and profit from their growth,” Routledge said at a press conference on Thursday, referring to the closely watched common equity Tier 1 (CET1) capital requirements, which compare the bank’s capital to its assets. The DSB, introduced in 2018, is a component of the CET1 ratio.Article contentCanadian banks must keep their CET1 ratio, including the DSB, above 11.5 per cent.

The Big Six boast an average CET1 ratio of about 13.6 per cent, which Routledge said gives them a cushion of more than $60 billion.Article content“The economy is doing better than we thought. The banks continue to deliver very good earnings,” Routledge said. “(The banks) continue to return capital to shareholders at a healthy rate … so we’re in an advantageous position, and that factored into our decision to hold the DSB.”Trending Philip Cross: The sad story of Justin Trudeau’s 'youthful idiots' FP Comment Posthaste: Here's where home prices plunged the most in tough year for Canada's housing market News Welcome to the K-shaped economy: Canadians look back on a 'brutal,' 'great' year in Trump's trade war Economy Trump official signals support for trade deal with Canada, Mexico Economy World watches as Ottawa's bullish shift on LNG puts wind at the back of two major projects Oil & Gas Article contentRoutledge said that if conditions aren’t as “advantageous” in the near future, OSFI is prepared to lower the DSB to help “the system absorb the costs and just continue to operate.”Article contentOSFI said Canadian household debt, relative to income, remains high, but relatively stable and below historical peaks. Canadian corporate debt growth has moderated, but credit quality is vulnerable to trade-related headwinds, and global uncertainty, including geopolitical risks, continues to shape the overall risk environment.Article contentIn 2022, OSFI expanded the upper limit of the DSB to four per cent, giving it leeway to increase capital requirements if needed.Article content• Email: nkarim@postmedia.comArticle contentShare this article in your social network Get the latest from Naimul Karim straight to your inbox Sign Up CommentsYou must be logged in to join the discussion or read more comments.Create an AccountSign in Join the Conversation Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information. Philip Cross: The sad story of Justin Trudeau’s 'youthful idiots' FP Comment Posthaste: Here's where home prices plunged the most in tough year for Canada's housing market News Welcome to the K-shaped economy: Canadians look back on a 'brutal,' 'great' year in Trump's trade war Economy Trump official signals support for trade deal with Canada, Mexico Economy World watches as Ottawa's bullish shift on LNG puts wind at the back of two major projects Oil & Gas