Regulator Keeps Capital Buffer at 1% for Canada’s Big Banks

Canada’s banking regulator kept the domestic stability buffer for the biggest banks unchanged at 1% of risk-weighted assets in its semi-annual review of the capital requirement, signaling confidence in the nation’s financial system amid the coronavirus pandemic.

“Canada’s largest banks entered this downturn from a position of strength and both the quantity and quality of their capital remains strong,” the Office of the Superintendent of Financial Institutions said Tuesday in a statement. “Fiscal and monetary policy responses have helped to cushion the impact of the pandemic.”

While OSFI typically reviews the buffer -- one of four capital requirements for Canada’s largest banks -- in June and December, it stepped in three months ago as part of government measures to ensure banks continued lending as the economy reeled amid a nationwide lockdown through the Covid-19 outbreak.

The announcement in March saw the domestic stability buffer lowered to 1% from 2.25%, with the Ottawa-based regulator saying it would not increase the buffer for at least 18 months. OSFI Superintendent Jeremy Rudin said in a BNN Bloomberg TV interview in April that the regulator “stands ready to take further steps” including the release of some or all of what remains of the domestic stability buffer “if need be.”

OSFI said the March release and regulatory policy adjustments are “promoting stability and resilience in the financial system.”

Still, the regulator flagged “elevated” financial-system vulnerabilities and asset imbalances, adding the pandemic has increased pressure on highly indebted households and businesses. Real estate is the main asset class OSFI monitors when it comes to controlling the buffer.

“Housing prices have generally shown resilience in recent months. However, the effects of physical distancing have led to slower activity within the Canadian housing market, reflected in tempered sales and listings,” Michael Toope, a communications adviser at OSFI, said in an email.

Home sales will fall 41% on average this year in Canada’s six largest markets, including Toronto and Vancouver, according to forecasts released Tuesday by the federal housing agency. Average prices will be little changed in 2020 before declining 6.3% in 2021, the agency said. None of the six markets -- which also include Calgary, Montreal, Ottawa and Edmonton -- is expected to see sales rebound to 2019 levels by the end of 2022.

Lower global growth presents the possibility that some external risks could spill over into the Canadian financial system, Osfi said.

Canada’s big banks already surpass the regulatory requirements for guarding against risks to the financial system. In addition to the domestic stability buffer, other capital requirements include a minimum Common Equity Tier 1 capital level, a capital conservation buffer and a surcharge for the six biggest banks deemed domestically significant.

©2020 Bloomberg L.P.

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