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Canadian Banks Told to Boost Capital Against Shocks for Third Time

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Canadian Banks Told to Boost Capital Against Shocks for Third Time

  • Some vulnerabilities to banks show signs of increasing: OSFI
  • OSFI boosts domestic capital buffer for third time since 2018
Bank towers stand in Toronto’s financial district.

Bank towers stand in Toronto’s financial district.

Photographer: Brent Lewin/Bloomberg
Bank towers stand in Toronto’s financial district.
Photographer: Brent Lewin/Bloomberg

Canada’s biggest banks are being ordered again to set aside more capital to guard against shocks, an indication the country’s banking regulator is getting more concerned about vulnerabilities such as household debt.

The Office of the Superintendent of Financial Institutions lifted its so-called domestic stability buffer for Canada’s six-biggest banks to 2.25% of total risk-weighted assets, effective April 30. This marks the third 0.25 percentage point increase since the regulator started publicly disclosing the buffer in June 2018.

Vulnerabilities to banks including Royal Bank of Canada and Toronto-Dominion Bank, “remain elevated, and in some cases show signs of increasing,” the regulator said in a statement from Ottawa on Tuesday. Those include Canadian household indebtedness, asset imbalances and institutional indebtedness, OSFI said.

“In addition, global vulnerabilities related to ongoing trade tensions and rising leverage are growing, which could increase the chance of a spillover of external risks into the Canadian financial system,” the regulator said.

Above Minimum

Against a backdrop of low interest rates and stable economic conditions, the regulator said it was “prudent” to build additional resilience against potential shocks to the financial system, according to OSFI.

The domestic stability buffer is one of four capital requirements for Canada’s biggest banks, which also include a minimum Common Equity Tier 1 capital requirement, a capital conservation buffer, a surcharge for the six biggest banks deemed domestically significant. Those capital requirements will represent 10.25% of risk-weighted assets by April, a level that Canada’s big banks already surpass. OSFI reviews the domestic stability buffer twice a year, in June and December.

What Bloomberg Intelligence Says:

A 25-basis point increase in Canadian banks’ Common Equity Tier 1 capital-ratio hurdle to 10.25%, announced Dec. 10, shows the lenders remain exposed to domestic and global vulnerabilities. However, their CET1 ratios are strong and are already 90-160 basis points above their potential maximum hurdle of 10.5%.

Himanshu Bakshi, Credit analyst

Canadian Banks’ CET1 Hurdle Increase Shows Vulnerability Remains

John Aiken, an analyts at Barclays Plc said he doesn’t see immediate nor near-term implications for the banks.

“However, the incremental 25 basis points placed on the buffer does indicate growing concerns from the regulator about the outlook for the sector,” Aiken said. “While the Canadian banks are more than adequately capitalized, in our view, we retain our belief that there is not truly much ‘excess’ capital in the system and believe that the banks will continue to be cautious when allocating, preferring to err towards caution.”

(Updates with quote from BI analyst near end.)