Canada’s big banks should be setting aside additional capital in preparation for future economic turmoil, the Office of the Superintendent of Financial Institutions (OSFI) announced Wednesday.
OSFI has raised the level for the domestic stability buffer for domestic systemically important banks’ (D-SIBs) to 1.75% of total risk-weighted assets (RWA), effective April 30, 2019. The buffer was previously set at 1.5% of RWA.
OSFI’s decision to increase the D-SIBs buffer for is based on its assessment that systemic vulnerabilities “remain elevated,” even as economic conditions remain accommodative, the banking regulators says in a news release.
“While Canada is currently in the midst of a favourable credit environment with a stable domestic economy, household debt levels continue to be high relative to incomes and uncertainty persists in some housing markets. Corporate indebtedness is also growing, representing a potential future risk,” says OSFI.
Banks should be setting aside capital so that they can weather a deterioration in economic conditions without being forced into asset-sales or a drastic reduction in their lending activity, the regulator says. The D-SIB buffer is to range between 0 and 2.5% of a bank’s total RWAs and must be met with tier 1 common equity.
“In light of positive credit performance and generally stable economic conditions, now is a prudent time for banks to build resilience against future risks to the Canadian financial system,” says Jamey Hubbs, assistant superintendent, deposit-taking supervision sector, OSFI, in a statement.