Canadian banking regulator announces boost to extra capital buffer

It significantly expands offering

Canadian banking regulator announces boost to extra capital buffer

The Office of the Superintendent of Financial Institutions has announced a major adjustment in its domestic stability buffer (DSB), a war chest of extra capital that can be used to reinforce the economy from significant shocks.

The DSB will now have a range of 0% to 4% of a bank’s risk-weighted assets. Additionally, the buffer’s maximum level will be increased by 0.5% to 3% when the next fiscal year begins on February 1.

The OSFI cited mounting household debt, elevated inflation, and the current rate-hike environment as the main drivers of the changes to the DSB.

“A lot of our thinking homes in around those types of risks,” said Angie Radiskovic, chief risk and strategy officer at OSFI.

“[The DSB adjustment decision] was very different for us than the experience we had in 2018 when we set the range for the first time,” she added. “This time we find ourselves in a completely different risk environment and we had the benefit of four years of experience with the DSB. And in thinking through what the adequate range should be, we leaned into some of that historical experience and lessons learned.”

How will the OSFI’s changes affect the market?

OSFI said that the adjustment will compel banks to allocate significant capital to respond to potential losses or economic volatility.

“This buffer can then be released during challenging times, allowing banks to absorb losses and continue to lend to businesses and households,” OSFI said.

This simultaneously boosts the safety net for both the institutions and their borrowers.

“Our review reaffirmed that, on the whole, the DSB continues to serve as a key tool aimed at ensuring both systemic stability and the resiliency of [domestic systemically important banks],” Radiskovic said. “By setting the DSB level at 3%, increasing the buffer’s upper limit to 4% and providing more insight into the risks and vulnerabilities that inform OSFI’s level-setting decisions, OSFI is enhancing the long-term effectiveness of, and public confidence in, the capital regime.”