The move to slash banks’ capital buffers back in March remains effective at tempering the effects of the economic disruption caused by Covid-19, says the Office of the Superintendent of Financial Institutions (OSFI), which is leaving those capital cushions at their current levels.
OSFI announced that the requirement for the Big Six banks to set aside extra capital will remain at 1.0% of risk-weighted assets.
When the Covid-19 pandemic first emerged, OSFI took a variety of actions to shore up the financial system, including cutting the added capital requirement, known as the domestic stability buffer (DSB), from 2.25% to 1.0%.
The reduction signalled to the banks that their buffers should be used to support lending activity at a time of economic distress.
“This response supported the resilience of the banking system by allowing banks to absorb losses while continuing to provide loans to creditworthy households and businesses,” OSFI said in a release.
The decision to keep the buffer unchanged at 1% “reflects OSFI’s view that the DSB reduction in March continues to be effective and appropriate given the current balance of vulnerabilities and risks in the environment,” the regulator said.
OSFI said that risks to the financial system “remain elevated but stable against a backdrop of ongoing uncertainty.”
When it initially reduced the buffer, OSFI said that it wouldn’t raise the requirement again for at least 18 months to give banks ample time to build back their capital levels. However, OSFI could still reduce the buffer if intensified economic stress called for such a move.
To that end, OSFI noted that it’s monitoring key vulnerabilities, including household and corporate debt levels, asset imbalances and the pandemic’s impact on economy.
“OSFI will continue to monitor economic and financial developments and remains ready to release the buffer further should conditions warrant,” the regulator said.
“The Canadian banking system was well prepared for this crisis. We expect that any decision to decrease or draw on buffers when needed will be seen as a normal course stabilizing action, and a sign of a well-functioning and effective capital regime,” Jamey Hubbs, assistant superintendent, deposit-taking supervision sector at OSFI, said in a release.