By Robb M. Stewart
OTTAWA–Canada’s banking regulator won’t require the country’s largest banks to set aside more capital to shield against potential losses during periods of financial uncertainty.
The Office of the Superintendent of Financial Institutions said Friday the domestic stability buffer, the store of capital that banks must have on hand to be able to absorb losses and continue lending during times of stress, will remain at 3.5% of risk-weighted assets.
The country’s six largest banks have reached a level of reserve capital that is sufficient to absorb losses if current vulnerabilities materialize into actual losses, the regulator said.
The buffer, introduced in 2018 in an effort to ensure systemic stability in the banking system, is set twice annually based on household debt, asset imbalances and other financial trends and risks. The regulator raised it half a percentage point in June and a similar half point last December, when it also lifted the top end of the buffer’s range to 4% from 2.5%.
The regulator said the buffer– which applies to Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank–means the banks are expected to target a Common Equity Tier 1 ratio of at least 11.5% of risk-weighted assets.
The ratio, a key measure of the ability to absorb losses, ranged from 12.4% to 14.4% for the so-called Big Six as of the end of October, an increase on a year earlier in most cases despite headwinds to bank earnings from rising provisions for credit losses and a slowdown in borrowing in the wake of the central bank’s aggressive rate-raising campaign.
Unemployment in Canada has been edging higher since April and hit its highest since January 2022 last month, and the broader economy is showing cracks, with gross domestic production contracting slightly in the third quarter of the year and the property market again weakening. As widely expected, the Bank of Canada this week held its policy interest rate steady at a more than two-decade high of 5%, though policymakers left the door open to further monetary policy tightening if needed.
The regulator said its assessment found that systemic vulnerabilities remain elevated, while near-term risks to the major banks are moderately increasing from very low levels.
OSFI said that since its last decision in June household debt levels and interest rates have remained elevated amid increased uncertainty in the housing market, and households with high debt levels continue to be vulnerable to payment shocks that come with higher mortgage rates when the loans are renewed. Still, it said there are some positive signs including improvements in the household debt-to-income ratio and in the falling rate of inflation.
Commercial real estate also faces material vulnerabilities brought on by higher interest rates, and intensifying geopolitical conflicts have exacerbated external vulnerabilities, OSFI said.
The regulator plans to continue to closely monitor financial system developments in Canada and abroad.
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