Stability buffer for banks remains at 1%
`Reduction in March continues to be effective, says federal regulator OSFI
The federal banking watchdog says weak spots in the financial system remain more pronounced than usual, but not enough for the regulator to adjust an added reserve required for Canada's biggest banks.
To guard against high levels of consumer debt and other vulnerabilities, the Office of the Superintendent of Financial Institutions requires Canada's six biggest banks to hold an extra buffer of high-quality capital that is equal to between zero and 2.5 per cent of their risk-weighted assets, such as loans.
OSFI announced on Tuesday that this domestic stability buffer would remain fixed at one per cent of the systemically important lenders' risk-weighted assets, leaving it unchanged from where the regulator lowered it to in March because of the coronavirus pandemic.
“The decision to continue to maintain the buffer at 1.00 per cent reflects OSFI's view that the reduction in March continues to be effective and appropriate, supported by fiscal and monetary policy responses as well as regulatory policy adjustments,” OSFI said in a letter to the banks. “At the same time, vulnerability levels remain elevated but stable against a backdrop of heightened uncertainty. OSFI remains ready to further release the buffer should conditions warrant.”
OSFI typically makes domestic stability buffer announcements twice a year, in June and December.
However, in March, the regulator suddenly lowered the buffer in response to the pandemic, dropping it to one per cent of risk-weighted assets and vowing not to increase it for at least 18 months. The regulator kept the buffer at one per cent in June as well.
The decision to lower the buffer was intended to help the biggest banks keep supplying credit to the economy during the pandemic and the choppy economic conditions it created. Doing so, the regulator said, would free up more than $300 billion of additional lending room for the Big Six.
“Throughout the pandemic, Canada's banks have demonstrated resilience and have continued to provide loans to support borrowers while maintaining robust capital levels,” OSFI said. “A well-capitalized banking system supports financial stability because it helps to cushion, rather than amplify, financial shocks.”
The banks were also expected to use their extra lending capacity to support people and businesses, not to increase executive compensation, boost dividends or buy back stock. OSFI's position since that day has been dividend increases and share buybacks should be off the table for all federally regulated financial institutions.
That expectation hasn't changed, effectively banning banks from hiking their dividend payouts or from repurchasing their own stock. It also remains the case as Canada's biggest banks have been seeing their capital levels climb, pushed higher by their own profits, among other things.
“Capital positions mainly benefited from better earnings, less credit migration, and slower loan growth,” Canaccord Genuity analyst Scott Chan wrote in a note to clients Tuesday.
The increased capital is stoking curiosity about what the banks are going to do with the money, and about when OSFI could end the ban on buybacks and dividend increases.
National Bank Financial analyst Gabriel Dechaine wrote in a note to clients on Sunday that the average common equity tier 1 ratio for the Big Six banks, a measure of their capital strength, was 12.2 per cent for the quarter ended Oct. 31, the highest on record for the lenders.
“We do not believe OSFI will eliminate restrictions on buybacks and dividend increases until mid2021, at the earliest,” Dechaine wrote. “However, we believe acquisitions are still possible.”