Canada’s financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), has said that it will be increasing the minimum capital buffer for the country’s major banks. The country’s largest six banks that control the majority of the banking sector include the Royal Bank of Canada (RBC), Canadian Imperial Bank of Commerce (CIBC), Toronto-Dominion (TD) Bank, Bank of Montreal (BMO), Bank of Nova Scotia (Scotiabank), and National Bank of Canada (National Bank).
This buffer is required as a cover for potential losses at a time when some financial system vulnerabilities have risen. Some of the vulnerabilities that have been impacted include the high level of household and corporate debt, the rising cost of debt, and heightened global uncertainty on fiscal and monetary policy.
Also referred to as the domestic stability buffer, it will be raised from the current 3% to 3.5% as of November 1. This is the second time that the buffer has been raised by 50 basis points since December 2022.
According to the Superintendent of Financial Institutions, Peter Routledge, the high level of household and corporate debt will make homes and companies more vulnerable to economic shocks. He, however, added that the financial sector had proven resilient over the last two quarters, with Canadian banks showing signs of strength. Routledge affirmed that the new buffer rate would bolster resilience and buy more insurance for financial stability.
Even with the announcement, major banks have already begun setting aside more funds in anticipation of borrowers likely struggling to make repayment. The buffer was a measure introduced in 2018 to help reinforce capital resilience to vulnerabilities for the country’s major banks.
With the increase, the common equity tier 1 for the six largest banks will rise from 11% to 11.5%. The ratio ranged from 11.9% to 15.3% for the top six banks at the end of the first quarter. Most banks are expected to reach 12% by the end of the year.
CPA and principal of Corporate Banking Advisory, Guy Heywood, has however expressed concern that a boost to the domestic stability buffer at around the same time as an increase to the interest rate by the Bank of Canada may lead to an economic recession and worsen the country’s productivity problems. Heywood said that business investment is also likely to keep declining, as happened during the pandemic. He noted that a lack of access to financing for SMEs was one of the key challenges identified by the Organisation for Economic Cooperation and Development (OECD) to the Canadian economy.
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