Canada’s banks will have to set aside a larger share of their capital to protect against downturns in lending and other potential financial risks.
The Office of the Superintendent of Financial Institutions (OSFI) said this week that it is raising the current 1.75% Domestic Stability Buffer requirement to 2% of total risk-weighted assets from October 2019.
Similar to how people save money for unexpected events, banks set aside capital so they can continue to operate and provide services to Canadians should economic conditions deteriorate.
The regulator notes three specific vulnerabilities within its rationale for the increase: Canadian consumer indebtedness; asset imbalances in the Canadian market; and Canadian institutional indebtedness.
“In light of positive credit performance and generally stable economic conditions, now is a prudent time for banks to build resilience against future risks to the Canadian financial system,” said Jamey Hubbs, Assistant Superintendent, Deposit-Taking Supervision Sector.
The current positive environment belies risk from high levels of household debt, uncertainty in some housing markets, and the build up of corporate debt levels.
Recently, in discussing vulnerabilities in the global financial system, the Financial Stability Board remarked that financial supervisors like OSFI should “consider using the current window of opportunity to build resilience, particularly macroprudential buffers where appropriate.”