Virus adding pressure on borrowers, says banking watchdog

Canada’s top banking regulator said Tuesday that the COVID -19 pandemic is putting more pressure on indebted households and businesses, but that it was not adjusting the capital cushion the country’s biggest banks must hold to guard against such risks.

The Office of the Superintendent of Financial Institutions announced the domestic stability buffer for Canada’s six biggest banks will remain for the time being at one per cent of their risk-weighted assets.

“This decision reflects OSFI’S assessment that the current DSB level remains effective in supporting the resilience of the Canadian banking system and the overall economy,” the regulator said in a press release.

OSFI said “both the quantity and quality” of capital at Canada’s biggest banks remains strong. It also said responses by policy-makers to COVID -19 — which would include OSFI lowering the DSB by 1.25 percentage points in March, to its current level of one per cent — have helped blunt the impact of the pandemic.

“At the same time, vulnerabilities in the financial system remain elevated and the pace of economic recovery is difficult to predict,” OSFI added in its press release. “The pandemic has added pressure on highly indebted households and businesses while asset imbalances remain elevated. Lower global growth also presents the possibility that some external risks could spill over into the Canadian financial system.”

The regulator said it would continue to monitor the situation, including the mortgage-payment deferrals that banks have granted to more than 700,000 Canadians. If need be, OSFI says it is “prepared to release the DSB further.”

OSFI’S domestic stability buffer requires Canada’s six biggest banks (known as domestic systemically important banks, or D-SIBS) to “set aside a portion of their capital during good times so they can draw down on that reserve in times of economic stress,” the regulator noted Tuesday.

The rainy-day reserve is hiked when OSFI thinks the Big Six should hold more capital to guard against risks, and it is lowered when vulnerabilities become less dire or when those threats actually come to pass. If a bank breaches the capital buffer, OSFI requires them to have a plan to fix the situation.