While increasing economic uncertainty makes it harder to predict the Office of the Superintendent of Financial Institutions’ (OSFI) forthcoming decision on capital buffers for the Big Six banks, Morningstar DBRS said it doesn’t expect any changes to the buffer requirements next week.
On Dec. 17, OSFI is scheduled to announce its semi-annual decision setting capital buffers for the domestic systemically-important banks (D-SIBs). The mechanism allows the regulator to push the banks to boost their capital positions in the face of rising systemic risks, or to enable them to draw down their capital buffers when financial stresses threaten the flow of credit to the economy.
In a report Tuesday, DBRS said it expects OSFI to keep the buffer unchanged at 3.5%.
“Although the highly uncertain economic environment makes OSFI’s decision somewhat more difficult to predict, we view systemic vulnerabilities and near-term risks to the [Big Six] as largely unchanged since OSFI’s last review of the [buffer] in June,” it said.
At the time, OSFI said it saw systemic risks as elevated, but stable, and that near-term risks remained low, but rising.
“We believe that this is still the case, supporting our view that OSFI is unlikely to change the buffer in its upcoming decision,” DBRS said.
Systemic vulnerabilities, such as household debt levels, and weaknesses in commercial real estate markets, remain elevated, it noted. But, the immediate threats haven’t changed enough to justify an adjustment in the buffer, the credit ratings agency added.
While the jobless rate has increased and insolvencies have risen significantly on a year-over-year basis, insolvencies dropped in the third quarter (on a quarter-over-quarter basis), and declining interest rates are expected to ease the load on heavily indebted consumers and businesses, DBRS said.
That said, it also noted that economic and policy uncertainty has increased in the wake of the U.S. election, which has further clouded the picture on inflation, interest rates and other key economic metrics.
Additionally, the shifting regulatory environment poses an added complication, with banking regulators, including OSFI, delaying implementation of the final requirements under the Basel III capital regime.
“While OSFI remains committed to Basel III reforms despite a one-year delay in the phase-in period, it will continue to monitor the implementation progress of these reforms across jurisdictions, considering both competitive balance in the banking sector and the soundness of Canada’s capital regime,” DBRS said.
As it stands though, the capital positions of the Big Six “ranged from 13.1% to 13.7%, with capital buffers comfortably above the current regulatory minimum threshold of 11.5% and sufficient to absorb potential credit losses,” the report concluded.