Big six banks well-prepared to handle financial shocks, regulator says
Canada’s top banking regulator has decided to keep the domestic stability buffer (DSB) for the country’s largest banks at 3.5%, maintaining the required “rainy day” funds to absorb potential financial shocks.
The Office of the Superintendent of Financial Institutions (OSFI) announced the decision following its latest review of capital requirements for systemically important banks. According to OSFI, the move reflects stable financial vulnerabilities and the banks’ ability to handle emerging risks effectively.
“Our decision to hold the DSB at its current level reflects the resilience of systemically important banks to absorb losses from unanticipated downside shocks and maintain the critical services they provide to Canadians,” Peter Routledge, the superintendent of financial institutions, said in the statement.
The DSB, measured as a percentage of risk-weighted assets like mortgages and credit card loans, acts as a cushion to ensure the Big Six banks can continue lending during periods of financial stress. Currently, Canadian banks are required to maintain a Common Equity Tier 1 (CET1) capital ratio—including the DSB—above 11.5%, while the average CET1 ratio across the Big Six stood at 13.3% as of October.
Routledge emphasized the banking system’s ability to withstand uncertainty, including potential disruptions from US President Donald Trump’s proposed 25% tariff on Canadian goods.
“We think the system has resilience to operate through quite handily,” Routledge stated, adding that built-in buffers provide a strong defence.
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One area OSFI continues to monitor is the anticipated wave of mortgage renewals in 2025 and 2026, which could see borrowers facing higher interest rates. While the issue is less concerning than during OSFI’s last DSB review in June, Routledge said the regulator does not foresee significant capital risks to the banking sector from these renewals.
“We don’t see the renewal issue over 2025 and 2026 as posing significant capital threats to the banking system,” he said. “Depending on how it plays out, there could be more or less earnings challenges, but we don’t see this as a capital issue.”
Market analysts had largely anticipated OSFI’s decision. John Aiken, an analyst at Jefferies Inc., noted that the lack of significant changes in the macroeconomic outlook supported the decision.
“OSFI has held the DSB flat for the past few decisions, and there is little in terms of the macro outlook or systemically that would lead it to be concerned,” Aiken told the Financial Post.
The DSB, first introduced in 2018, gives OSFI the flexibility to raise or lower capital requirements for systemically important banks as needed. In 2022, the regulator expanded the upper limit of the DSB to 4%, providing additional room to adjust capital buffers if required.
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