Banks warned off buybacks, other hikes
Ottawa is loosening capital requirements for Canada’s biggest banks, but asking lenders not to buy back shares or hike dividends with the extra cash, as the federal government and regulators moved Friday to bolster the financial system.
Finance Minister Bill Morneau, Superintendent of Financial Institutions Jeremy Rudin and Bank of Canada Governor Stephen Poloz all gathered in Ottawa to announce the plan of attack, which comes as the new coronavirus and a sudden drop in oil prices have rattled the global economy and markets.
One measure being deployed is that the Office of the Superintendent of Financial Institutions is reducing the amount of capital Canada’s six biggest banks must carry.
The regulator will do so by lowering the “domestic stability buffer” ( DSB) that the Big Six must maintain, “a requirement which is built up in good times, and is released when needed,” Rudin said.
As of the end of April, the buffer had been set to rise to 2.25 per cent of risk-weighted assets, such as loans. Now, it has been cut to one per cent of those assets, effective immediately, which will reduce the amount of high- quality capital the banks must have on hand.
“This action is being taken in order to support ( domestic systemically important banks’) ability to supply credit to the economy during an expected period of disruption related to COVID-19 and market conditions,” OSFI said in a news release, adding that the release of the buffer would support more than $300 billion of extra lending capacity by the big banks.
OSFI said banks were being encouraged to use this capital if necessary, that there remains room for it to take further action if necessary and that no increase of the buffer will take effect for at least 18 months.
There are, however, some strings attached. Namely, the regulator wants banks to avoid splurging on dividends or buybacks with the extra cash.
“OSFI expects that banks will use the additional lending capacity to support Canadian businesses and households, and should not use this measure to increase distributions to shareholders or employees or to undertake share buybacks,” the press release said. “Consistent with this, OSFI has today set the expectation for all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being.”
COVID-19 has disrupted the operations of Canada’s banks as well as that of OSFI, which has said all its staff will work outside its offices until April 5 after the regulator announced one of its Ottawa employees was being tested for the virus.
Other moves announced Friday include a $ 10- billion credit program for businesses and another half- a- percentage- point rate cut by Poloz and the Bank of Canada. Morneau said the government is also preparing a significant stimulus plan to that will be released next week.