The Bay Street Financial District in Toronto. The domestic stability buffer also affects the minimum capital levels that a bank is expected to hold.Nathan Denette/The Canadian Press
Canada’s banking regulator has held steady the capital cushion that the country’s largest lenders must reserve, signalling that financial institutions are withstanding the volatile U.S. trade war and economic uncertainty wrought by escalating geopolitical tensions.
The Office of the Superintendent of Financial Institutions said Thursday that the domestic stability buffer – capital that banks must maintain to weather the blow of an economic downturn – will remain at 3.5 per cent of a bank’s risk-weighted assets.
Superintendent of Financial Institutions Peter Routledge said banks have evaded significant impacts from higher tariffs, rising loan loss reserves and consumer and business concerns over a deteriorating economy. But the regulator is focusing on potential “spillovers” of these issues in the banks amid persistent uncertainty.
“Conditions thus far are better than our planning assumption earlier in the year. We take only a moderate level of comfort from that, and we remain focused on downside scenarios,” Mr. Routledge told reporters during a press conference Thursday.
“We view the Canadian banking system as well positioned to absorb a deterioration in conditions, if they occur.”
In recent years, OSFI increased the buffer twice – hiking it from 2.5 per cent – to build a bigger safety net to fend off an economic downturn. The higher level forced lenders to reserve billions of dollars in excess cash, taking a chunk out of profits.
The regulator also previously increased the potential range of the buffer to between 0 and 4 per cent, up from a maximum of 2.5 per cent.
Analysts and senior bankers have expressed concern over how higher capital levels could harm the competitiveness of Canada’s banking sector by putting the lenders at a disadvantage to global peers. The standard range set by Basel III – an international accord struck after the 2008 financial crisis to help prevent bank failures – is lower, at 0 per cent to 2.5 per cent of a bank’s risk-weighted assets.
The U.S. has been easing up on stricter financial sector regulations, prompting regulators in other countries to rethink implementing higher requirements. Yesterday, the U.S. Federal Reserve voted in favour of reducing the supplementary leverage ratio requirements for banks.
“Lighter regulation in the U.S. could mean the same for Canada in due course. Communication from the new Vice Chair for Supervision of the Federal Reserve, Michelle Bowman, has indicated a shift in policy to light regulatory requirements in the future,” CIBC analyst Paul Holden said in a note to clients.
“While only the first step in the process, we view this as indicative of the direction the regulators are likely to go. We would not be surprised if the minimum common equity tier 1 requirement set by OSFI is reduced at some point in the future.”
The domestic stability buffer also affects the minimum capital levels that a bank is expected to hold. The CET1 ratio – a measure of a lender’s ability to absorb losses – remains at 11.5 per cent.
Mr. Routledge said Canada’s biggest banks have remained profitable even as risk challenges ramp up.
The average CET1 ratio of the country’s largest lenders sits at 13.6 per cent, up almost 30 basis points over the past 6 months. (A basis point is one-100th of a percentage point.)
The median CET1 ratio for global systemically important banks is 13.4 per cent. That’s in line with Canadian banks, indicating that OSFI’s rules are on par with other regulators, Mr. Routledge said.
“The DSB is a resilience buffer, and we don’t set that giving any consideration to competitive issues,” he said. “We set is giving consideration to what the impacts of a stress scenario would have on the balance sheets of banks.”
