Officials seem to believe that banks' balance sheets can handle the current state of the economy
The Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking regulator, has kept the capital requirements on the largest lenders in the country steady.
The move signals that officials think that the balance sheets of banks are strong enough to handle the weakening economy, an article by Bloomberg suggests.
The OSFI kept the domestic stability buffer at 3.5% after it had increased it in June and last December. This means that the six largest Canadian banks will be entering 2024 with the requirement to hold Common Equity Tier 1 capital of at least 11.5% of risk-weighted assets.
All of the six banks sat comfortably above that level with Canadian Imperial Bank of Commerce and Bank of Montreal being the closest to the minimum.
With the buffer acting like a rainy-day fund that can protect the system through ensuring that banks are able to absorb losses during a weak economy or shock to the financial system, the OSFI had been raising it in stages since 2021.
Peter Routledge, the banking superintendent, said that the two key risks for Canadian banks were high levels of debt incurred by consumers and the weakness in the commercial real estate industry.
“But we haven’t seen very significant losses in either of those sectors,” said Routledge, further noting that the risks also did not worsen in the six months that passed after the regulator last raised the buffer.
The strain of a weakening economy
Compared to 2022, banks were setting aside provisions that were significantly larger for soured loans because of higher interest rates, greater financial stress among households, and a poor outlook for the Canadian economy.
In the third quarter, the estimates of the national statistics agency found that the Canadian economy shrank to a 1.1% annualized rate. While the central bank’s official forecast did not state that there will be a recession in the coming year, there was still projected slow growth and muted expansion in household spending.
Elevated mortgage payments were partly responsible for the strain on Canadian consumers’ finances as borrowers in Canada cannot lock in their borrowing costs for longer than five years, in contrast to the US where they can secure rates that last for 30 years.
In October, the Bank of Canada stated that it saw signs of financial stress among people without mortgages as more were now at least 60 days behind on their loan payments. The delinquency rate on car loans was also higher than it was before the pandemic.
