Canada’s biggest banks told to hike domestic stability buffer

Canada’s federal banking regulator is increasing the amount of capital that Canada’s biggest financial institutions must hold as a protective buffer against vulnerabilities, but the effects of the change are expected to be limited as industry analysts say the banks already exceed the criteria.

The Office of the Superintendent of Financial Institutions said Tuesday it’s necessary to increase the minimum buffer because key risks to the banking system remain elevated and in some cases are showing signs of increasing.

Those vulnerabilities include high levels of household and institutional indebtedness — a long-standing risk for Canada — as well as global trade tensions between the United States and its trading partners, particularly China.

OSFI said the domestic stability buffer for Canada’s six biggest banks will rise to 2.25 per cent of total riskweighted assets as of April 30 — which will be the third quarter-point increase in the last 18 months.

In turn, the higher domestic buffer will push up the banks’ minimum Tier 1 common equity requirement (CET1) to 10.25 per cent from 10 per cent. CET1 is a key measure of financial stability for the sector.

“And the banks have been comfortably above that, in the 11.5- to 11.6-per-cent range in the last quarter,” said DBRS Morningstar senior vicepresident Robert Colangelo.

Scott Chan, Canaccord Genuity’s managing director of research for financial sector, said it’s not surprising that the regulator increased the buffer again since it had done so twice previously after conducting its sixmonth review.

“OSFI . . . is just being more prudent and raising the minimum capital standards that the Big Six banks must abide by. So if we do have a down-side scenario, the banks would be able to withstand it,” Chan said.