The cut frees up roughly $74 billion in excess capital across Canada's largest banks
Canada's six biggest banks just got handed roughly $74bn in excess capital to put to work, after the country's banking regulator eased a key requirement for the first time in three years.
The Office of the Superintendent of Financial Institutions (OSFI) said on Friday it lowered the domestic stability buffer (DSB) to 3.0 percent of total risk-weighted assets from 3.5 percent, effective immediately.
According to OSFI, the buffer sets the extra capital that Royal Bank of Canada, TD Bank, BMO, Bank of Nova Scotia, CIBC, and National Bank of Canada must hold to absorb losses during financial stress.
It is the first change since June 2023, and Bloomberg reported that analysts treated it as a positive surprise.
The 50-basis-point cut now requires the banks to hold common equity tier 1 (CET1) capital of at least 11 percent of risk-weighted assets, down from 11.5 percent.
All six already clear that bar comfortably, with CET1 ratios averaging 13.5 percent across the sector, OSFI noted.
The regulator framed the release as a chance for banks to deploy capital more freely.
The banking system is healthy enough to take on more risk and the regulator will not stand in the way, Peter Routledge, Canada's superintendent of financial institutions, told Bloomberg.
He told Reuters the opportunities were there for the banks and that his office was "getting out of the way."
OSFI tied the move to lenders' "extraordinary loss-absorption capacity," as per Reuters, and pointed to opportunities in defence and security, critical infrastructure, resources, and artificial intelligence.
Bloomberg reported that while the regulator cannot direct how banks run their businesses, it signalled the relief is meant to boost lending for domestic priorities.
"It's up to the banks to figure out how to deploy it.... certainly one avenue is supporting the Canadian economy's adjustment to this new environment," Routledge told Reuters.
The banks enter this period from a position of strength.
According to the same outlet, all six beat profit expectations in the latest quarter on strong domestic and capital-markets earnings, while diversified models and underwriting slowed loan impairments and credit losses.
The regulator added that unemployment, consumer delinquencies and credit losses have stabilized in recent periods.
The outlet noted that Canada's top six banks control roughly 90 percent of the market and rank among the world's most resilient.
Still, executives at the six banks told Reuters the near-term outlook hinges on trade talks with the US and how long the Middle East conflict lasts, factors that will shape client demand, supply-chain stability and the direction of monetary policy.
