Canada’s banking watchdog is boosting a key threshold for the big banks’ capital reserves as the pandemic recovery accelerates.
In a release Thursday, the Office of the Superintendent of Financial Institutions (OSFI) raised the Domestic Stability Buffer (DSB) to 2.5 per cent of risk-weighted assets, up from the current one per cent.
The increase takes effect Oct. 31, in line with OSFI’s earlier pledge not to increase the buffer until this fall.
In an interview Thursday, OSFI Superintendent Jeremy Rudin said the move was prudent given the evolving environment, as economic shocks from the pandemic have eased.
“It’s time to rebuild the buffer, particularly because we’re making good progress in the banking recovery, and bank capital levels have been resilient over the entire period. Our judgment is that fall is the right time to build the buffer back up again,” he said.
OSFI highlighted that key vulnerabilities remain, in particular elevated levels of household and corporate debt, which factored into its decision to have the banks increase the capital reserve.
The move comes a little more than a year after OSFI abruptly slashed the DSB to one per cent in the early days of the pandemic, after earlier outlining plans to increase the buffer to 2.25 per cent.
The cut was meant to ensure banks could pump adequate amounts of cash into the economy through loans to individuals and businesses.
Over the course of the pandemic, the big banks have been steadily building up their capital levels, in part due to restrictions OSFI put on share buybacks and dividend increases. As of the end of the fiscal second quarter, the Big Five banks had an average common equity Tier 1 ratio of 12.9 per cent, well above OSFI’s nine per cent minimum.
Rudin, however, said the regulator will take its time before loosening the rules to allow the big banks to once again hike dividends and buy back stock.
“The restriction on distributions is something else again: that’s an extraordinary step that we took in response to the pandemic. It’s always meant to be temporary,” he said. “Those restrictions, therefore, will get released at some point. We need to make further progress in leaving the pandemic behind us before we’re comfortable in doing that.”