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Regulator keeps capital buffer for big banks at 1% but warns vulnerabilities remain elevated


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Regulator keeps capital buffer for big banks at 1% but warns vulnerabilities remain elevated

A federal financial regulator said Tuesday that the COVID-19 pandemic is putting more pressure on indebted households and businesses, but that it was not adjusting a level of capital Canada’s biggest banks must hold to guard against such risks.The Office of the Superintendent of Financial Institutions announced the domestic stability buffer for Canada’s six biggest…

Regulator keeps capital buffer for big banks at 1% but warns vulnerabilities remain elevated

A federal financial regulator said Tuesday that the COVID-19 pandemic is putting more pressure on indebted households and businesses, but that it was not adjusting a level of capital Canada’s biggest banks must hold to guard against such risks.

The Office of the Superintendent of Financial Institutions announced the domestic stability buffer for Canada’s six biggest banks will remain for the time being at one per cent of their risk-weighted assets, such as mortgages.

“This decision reflects OSFI’s assessment that the current DSB level remains effective in supporting the resilience of the Canadian banking system and the overall economy,” the regulator said in a press release.

OSFI said “both the quantity and quality” of capital at Canada’s biggest banks remains strong. It also said responses by policymakers to COVID-19 — which would include OSFI lowering the DSB by 1.25 percentage points in March, to its current level of one per cent — have helped blunt the impact of the pandemic.

“At the same time, vulnerabilities in the financial system remain elevated and the pace of economic recovery is difficult to predict,” OSFI added in its press release. “The pandemic has added pressure on highly indebted households and businesses while asset imbalances remain elevated. Lower global growth also presents the possibility that some external risks could spill over into the Canadian financial system.”

The regulator said it would continue to monitor the situation, including the mortgage-payment deferrals that banks have granted to more than 700,000 Canadians. If need be, OSFI says it is “prepared to release the DSB further.”

OSFI’s domestic stability buffer requires Canada’s six-biggest banks (known as domestic systemically important banks, or D-SIBs) to “set aside a portion of their capital during good times so they can draw down on that reserve in times of economic stress,” the regulator noted Tuesday.

The rainy-day reserve is hiked when OSFI thinks the Big Six should hold more capital to guard against risks, and it is lowered when vulnerabilities become less dire or when those threats actually come to pass, so that banks can keep lending and serving customers. If a bank breaches the capital buffer, OSFI requires them to have a plan to fix the situation.

OSFI sets the level of the domestic stability buffer semi-annually, in June and December, but it can also make snap adjustments if necessary. This happened back on March 13, when the regulator dropped the buffer to one per cent of risk-weighted assets from 2.25 per cent, the level it had been set at effective April 30. Doing so, OSFI said, would help free up approximately $300 billion of extra lending room for the major lenders during the outbreak.

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“The recent DSB release is working as intended, acting as a stabilizing tool to support banks’ ability to absorb losses and to continue lending to Canadians,” said Jamey Hubbs, assistant superintendent for OSFI’s deposit-taking supervision sector, in Tuesday’s release.

Total credit growth among the big banks was around $170 billion in March and April, an increase of approximately six per cent over the two months, Hubbs told reporters on Tuesday. This included loans to new and existing customers, but OSFI has so far seen “little evidence” of a change in underwriting standards, Hubbs added.

OSFI has also warned lenders it expects them to use lending capacity freed up by the DSB reduction to support businesses and households, and not on increased shareholder dividends or stock buybacks. In addition, OSFI said in March there would be no increases to the buffer for at least 18 months.

Leaving the domestic stability buffer at one per cent means the regulatory minimum for the Big Six banks’ common equity tier 1 ratio — a measure of their capital strength — is still nine per cent, which includes the DSB, a capital conservation buffer and a surcharge for DSIBs.

As of the end of their fiscal second quarter on April 30, the Big Six had an average CET1 ratio of 11.2 per cent, noted Canaccord Genuity analyst Scott Chan.

“We believe the group has significant excess capital … that helps support current dividend payments,” Chan wrote.

• Email: gzochodne@nationalpost.com | Twitter: GeoffZochodne

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