Major banks’ capital buffer at record level
TORONTO — Canada’s financial regulator raised the amount of capital the country’s biggest lenders must hold to guard against risks to a record 2.5 per cent of riskweighted assets, from one per cent currently, in a surprise move that could pave the way for the banks to resume dividends and share buybacks.
The new measures, which take effect on Oct. 31, is a sign that the economic and market disruptions stemming from the coronavirus pandemic have abated and banks’ capital levels have been resilient, the Office of the Superintendent of Financial Institutions (OSFI) said in a statement, while acknowledging that key vulnerabilities, including household and corporate debt levels, remain elevated.
The increase in the Domestic Stability Buffer (DSB) to the highest possible level raises the Common Equity Tier 1 (CET1) capital — the core bank capital measure
— to 10.5 per cent of riskweighted assets; a 4.5 per cent base level, a “capital conservation buffer” of 2.5 per cent, and a one per cent surcharge for systemically important banks, plus the DSB.
Even with the higher buffer requirement, Canada’s six biggest banks would be sitting on excess capital of about $51 billion over the regulatory requirement, dropping from $82 billion prior to the new rules, according to Reuters calculations.
The big six lenders had amassed excess capital during the pandemic, driven in part by a moratorium on dividend increases and share buybacks imposed by OSFI in March 2020, even as a pandemic-driven surge in loan losses has so far failed to materialize.
Their CET1 ratios range from a low of 12.2 per cent at National Bank of Canada to 14.2 per cent at Toronto-dominion Bank, as of April 31.
“Each of the banks is well above the pro forma 10.5 per cent minimum requirement,” National Bank Financial Analyst Gabriel Dechaine said. “More importantly, we believe it gives OSFI more leeway to loosen a restriction down the road, namely the freeze on buybacks and dividend increases.”
The increase is the first since the last one announced in December 2019, which did not come into effect as planned in April 2020, as OSFI made an out-of-schedule change that dropped the rate to one per cent in March.