Canada's big banks told to build up vulnerability buffer

OSFI has increased the capital buffer requirement to strengthen the Big 6 against vulnerabilities

Canada's big banks told to build up vulnerability buffer
Steve Randall

Canada’s big six banks will need to build up their capital buffer to further protect against vulnerabilities.

The Office of the Superintendent of Financial Institutions (OSFI) said Tuesday that it was increasing the Domestic Stability Buffer to 2.25% of total-weighted assets from April 30, 2020.

It’s the third 0.25 percentage point increase since the regulator first publicly disclosed the buffer in June 2018.

The decision to increase it reflects OSFI’s concern that the Big 6 are vulnerable to risks that are “elevated, and in some cases show signs of increasing.”

Some of the risks are domestic, including household indebtedness, asset imbalances, and institutional indebtedness.

But others are external, with the regulator saying: “global vulnerabilities related to ongoing trade tensions and rising leverage are growing, which could increase the chance of a spill-over of external risks into the Canadian financial system.”

Despite the increase, John Aiken, an analyst at Barclays Plc, told Bloomberg that he doesn’t see immediate or near-term implications for the banks.

“However, the incremental 25 basis points placed on the buffer does indicate growing concerns from the regulator about the outlook for the sector,” Aiken said. “While the Canadian banks are more than adequately capitalized, in our view, we retain our belief that there is not truly much ‘excess’ capital in the system and believe that the banks will continue to be cautious when allocating, preferring to err towards caution.”