OSFI maintains bank capital buffer at 2.5%

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Amid growing concerns about the economy and consumer debt, driven by soaring inflation and rising interest rates, Canada’s banking regulator on Wednesday left the capital buffer of big banks at 2.5% after its semi-annual review, concluding that near-term risks are moderate but rising.

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The Domestic Stability Cushion is one of the primary tools the Office of the Superintendent of Financial Institutions uses to ensure banks can withstand shocks and continue to lend money. The buffer is meant to be built up in good times and used in bad times to avoid unnecessary asset sales or drastic loan write-downs.

At the onset of the COVID-19 pandemic, in March 2020, OSFI lowered the cushion to 1% to quickly free up capital and support banks’ lending activity.

It was then reduced to 2.5% last October.

The banking prudential regulator kept the buffer at this higher level after determining that “systemic vulnerabilities remain elevated and have increased”, and concluded that near-term risks are moderate but increasing in “an environment of heightened uncertainty”.

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OSFI said Wednesday it expects Canada’s big banks “to exercise increased vigilance and prudence in their capital management practices with a view to preserving capital.”

Cushion reductions are intended to occur when OSFI determines that vulnerabilities have diminished or risks have materialized.

Jamey Hubbs, Deputy Superintendent of OSFI, said maintaining the domestic stability buffer at 2.5% of total risk-weighted assets is “a wise and prudent decision, given the growing vulnerabilities mainly due to the historically high Canadian household indebtedness and potential asset price imbalances. .”

Consumer price inflation in Canada accelerated in May at the fastest rate since January 1983, reaching 7.7%, Statistics Canada announced on Wednesday.

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Consumers are being hit with higher prices at the same time financing costs are on the rise as the Bank of Canada raises interest rates to curb inflation and house prices begin to fall. Variable-rate mortgage holders who took out loans when interest rates were at historically low levels could be among the most vulnerable to continued sharp rate hikes. After three consecutive increases, the senior deputy governor of the Bank of Canada, Carolyn Rogers, did not rule out a 75 basis point increase in July on Wednesday.

A recent Manulife Bank survey found that more than 20% of homeowners expect rising rates to have a “significant negative impact” on their mortgage, financial and debt situation, with 18% saying they can no longer afford the house. they are there. Nearly one in four said they will have to sell if rates go much higher.

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“The pace of inflation is something we are watching very closely, given the potential implications for the economy and the impact it could have on interest rates,” OSFI’s Hubbs said during a conference call with the media.

“Highly indebted households was one of the vulnerabilities that we looked at (and) that certainly factored into our assessment of the appropriate level for the domestic stability cushion.”

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He said OSFI does not make economic forecasts, including how long the interest rate hike will last, nor does the regulator rely on a ‘mechanical formula’ in its analysis. to determine adjustments to the stability pad.

“We have a judgment overlay,” he said. “We are building a capital regime that is resilient to severe but plausible events, or severe but plausible trajectories.”

The domestic stability buffer applies only to federally regulated financial institutions that are designated as National Systemically Important Banks, or D-SIBs.

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