Canada financial regulator lifts stability buffer for big six banks

By Nivedita Balu and David Ljunggren

TORONTO (Reuters) -Canada’s financial regulator on Tuesday said it was raising the amount of capital the country’s biggest lenders must hold as a stability buffer by 50 basis points to 3.5%, citing rising borrowing costs, high debt levels and stress on the financial system.

The Office of the Superintendent of Financial Institutions (OSFI) in a statement said the change would come into effect on Nov. 1.

The statement highlighted concerns over high household and corporate debt levels, the rising cost of debt, and increased global uncertainty around fiscal and monetary policy.

Given the financial sector had shown strength during the last two quarters, OSFI felt now was the time to act, it said.

“We are taking action to enhance the resilience of Canada’s largest banks against vulnerabilities,” said Superintendent of Financial Institutions Peter Routledge.

The regulator’s move comes as more Canadians struggle to service debts, amid rising concerns that delinquency rates for mortgage payments could increase.

Big banks have already set aside more funds anticipating consumers’ struggles to make payments in a challenging economy.

“The higher buffer is meant to provide extra capital for a rainy day down the road,” Desjardins analyst Royce Mendes said.

“The prudent approach of both regulators and regulated institutions should give global investors even more confidence in the Canadian financial system.”

The stability buffer, launched in 2018 to help banks build capital resilience to vulnerabilities, applies to Canada’s largest banks and is set twice a year, but can be changed at other times.

The common equity tier 1 ratio for Canada’s six largest banks will now increase to 11.5%, up from 11%. The ratio compares a bank’s capital against its risk-weighted assets to measure its resilience in a downturn.

The ratio for the top six banks ranged between 11.9% and 15.3% at the end of the first quarter, while most banks have been targeting 12% by end-2023.

The move marked the second consecutive time OSFI has increased the size of the buffer. Last December it raised it 50 basis points to 3.0%. The DSB has been raised in the past two years after being lowered during the pandemic.

(Reporting by David Ljunggren in Ottawa and Nivedita Balu in Toronto; Editing by Mark Porter, Jan Harvey, Alexandra Hudson)