OSFI cuts banks' buffer, puts hold on mortgage stress test

The regulator has announced several actions amid coronavirus response

OSFI cuts banks' buffer, puts hold on mortgage stress test
Steve Randall

The buffer that Canada’s largest financial institutions must maintain in case of financial crisis has been relaxed by the regulator.

OSFI has cut the Domestic Stability Buffer to 1% with immediate effect. It was due to increase to 2.25% from April 30, 2020, but will now not do so for at least 18 months.

OSFI stated that it expects institutions to use the release of funds from their buffers to maintain lending to businesses and households during the COVID-19 coronavirus crisis.

The domestic systemically important banks (D-SIBs) have a collective buffer of around $300 billion.

OSFI says that the expectation is that none of this reserve will be used to increase distributions to shareholders or employees or to undertake share buybacks.

To support this expectation, the regulator says that it expects banks to halt dividend increases and share buybacks “for the time being.”

Mortgage stress test

OSFI has also announced the suspension of all consultations and policy development on all new and revised guidance until conditions stabilize.

This includes the consultation on the mortgage stress test for uninsured mortgages with the current BoC benchmark rate continuing to be use until further notice.

The changes to the rate used for insured mortgages has also been suspended as announced by the Minister of Finance. This was due to change on April 6, 2020.

OSFI noted in its announcement that Canada’s banks are resilient with strong overall capital ratios and quality of capital, which together with the actions announced should ensure the flow of credit endures while the current economic disruption continues.