Updated: Amid elevated debt levels, OSFI boosts banks’ capital demands

The Office of the Superintendent of Financial Institutions (OSFI) said on Tuesday that it is raising the domestic stability buffer to 2.0% of total risk-weighted assets, effective Oct. 31.

“This reflects OSFI’s assessment that, on balance, the identified systemic vulnerabilities remain elevated while economic conditions continue to be accommodative,” it said.

The vulnerabilities highlighted by OSFI include household debt levels, asset imbalances in the Canadian market and Canadian institutional indebtedness.

The added capital cushion is designed to contribute to overall financial stability by ensuring an additional buffer against risks and vulnerabilities at the domestic systemically important banks (D-SIBs), which includes all of Canada’s big banks.

“Decisions on the calibration of the buffer are based on OSFI supervisory judgement, informed by its monitoring and analytical work on a range of vulnerabilities, and are made in consultation with OSFI’s federal financial regulatory partners,” OSFI said.

OSFI sets the buffer twice a year, in June and December, “based on its ongoing monitoring of federally regulated financial institutions as well as system-wide and sectoral developments.”

Last December, it set the buffer at 1.75%.

Toronto-based rating agency DBRS Ltd. noted that while the big banks already have sufficient capital to meet the higher requirements announced by OSFI, the increase to the buffer may impact their plans to return capital to shareholders.

“The banks may reduce their plans for distributions to shareholders for the remainder of 2019 and next year to bolster these internal buffers,” it said in a research note.