The planned increase in the domestic stability buffer at the big Canadian banks represents a vote of confidence in the economic recovery, said DBRS Morningstar in a recent report.
On Thursday, June 17, the Office of the Superintendent of Financial Institutions (OSFI) announced that the capital buffer required of the domestic systemically important banks (D-SIBs) will be raised to 2.5% from 1.0% as of Oct. 31.
OSFI slashed the buffer to 1.0% in March 2020 as part of its response to the economic fallout from the Covid-19 pandemic. Lowering the buffer requirement gave the big banks flexibility to absorb losses and keep supplying credit to the economy.
DBRS said the decision to reverse that move and increase the buffer represents “OSFI showing confidence in the economic environment and bank capitalization levels.”
The bigger buffer will result in higher minimum capital requirements and higher total loss-absorbing capital requirements for the big banks.
“The large Canadian banks continue to maintain strong capital ratios and already meet the higher [minimum] requirement,” DBRS said.
At the same time, regulatory restrictions on the banks’ capital management activities, such as increasing dividends and buybacks, are still in effect, DBRS noted — but, with the buffer being restored, it expects that the restrictions will soon be relaxed too.
“Given the still sizable capital buffer of the D-SIBs, even with the higher requirement, and the improving economy, we anticipate that restrictions on capital management will be relaxed later this year and capital levels will continue to build in the interim,” the report said.