Bank skyscrapers in downtown Toronto

The announcement last December that the Office of the Superintendent of Financial Institutions (OSFI) is hiking the capital buffer imposed on Canada’s big banks represents an effort to help demystify the regulatory process, says Jamey Hubbs, assistant superintendent, deposit-taking supervision sector, OSFI.

Speaking Wednesday at a lunch hosted by the C.D. Howe Institute in Toronto, Hubbs aimed to explain OSFI’s decision to raise the “domestic stability buffer” by 25 basis points.

“The December buffer increase is in line with our view that banks should build up capital to buffer themselves from risks when economic times are relatively good and capital is easier to build and hold,” he said.

He also stressed the importance of communicating that decision to the market. “By making the domestic stability buffer more transparent and its purpose and functioning more widely understood, we hope that future increases or decreases to the buffer are seen as normal course of business and stabilizing actions, rather than market events unto themselves,” he said.

The effort to bolster transparency also reflects a lesson from the financial crisis, which, Hubbs noted, demonstrated that confidence is more valuable than capital in a crisis.

“This additional transparency came about as OSFI realized that while holding an appropriate amount of capital is important, markets also need to be aware when the regulator expects and is comfortable with banks being able to use that capital in times of stress,” he said.

Indeed, Hubbs stressed that OSFI is committed to lowering the buffer during times of economic stress, so that banks can tap the extra capital when they really need it.

“OSFI will continue to monitor for severe yet plausible risks to the financial system, and will be transparent in the actions that it is taking to address them,” he concluded.