Mortgage renewals, commercial real estate woes prompt Canada to hold bank buffer steady
Canada's big banks will be required to maintain a capital buffer at its current level amid concerns about high household debt and rising geopolitical tensions, the federal banking regulator announced.
The Office of the Superintendent of Financial Institutions (OSFI) said on Wednesday that the Domestic Stability Buffer (DSB) will remain at 3.5% of total risk-weighted assets for Canada's six largest lenders, also known as Domestic Systemically Important Banks (D-SIBs).
"OSFI's decision to maintain the DSB level reflects its current assessment that systemic vulnerabilities remain elevated and broadly stable, while near-term risks to D-SIBs are still low but rising," the regulator stated in a summary note.
Household debt remained a key concern, particularly as many mortgages are expected to be renewed at higher interest rates in the future. This could potentially strain borrowers' ability to repay their loans.
Commercial real estate markets, particularly those focused on office space, construction, and development, were also flagged for vulnerabilities due to declining demand and rising costs.
Additionally, geopolitical instability in the Middle East raised concerns about its potential impact on commodity prices and global growth, which could indirectly affect the Canadian financial system.
While near-term risks have increased somewhat due to factors like rising insolvencies earlier this year, OSFI noted that D-SIBs have continued to perform well and remain adequately capitalized despite higher loan loss provisions.
Read more: Big Six Canada banks: How concerning are climbing credit loss provisions?
The DSB requires D-SIBs to hold additional capital that can be used to absorb potential shocks. By maintaining it at 3.5%, OSFI continues to expect these banks to target a minimum 11.5% Common Equity Tier 1 ratio.
"D-SIBs must continue to exercise sound judgment in capital management,” OSFI Superintendent Peter Routledge said. “The DSB is not a substitute for prudent capital management, and all institutions must have strong capital risk-management plans in place. We continue to monitor the environment closely and are ready to make further adjustments to the DSB as conditions warrant."
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