OTTAWA (CU)_As many countries across the globe begin to recover from the economic downfall of the pandemic, Canada’s banking regulator says that there are some “key vulnerabilities” that still remain, including corporate and household debts which have intensified over the past year. Therefore, several measures introduced last year in order to protect the financial system amid the global health crisis, such as the prohibition on increasing dividends or buying back shares, continue to remain in place.
Nevertheless, the Office of the Superintendent of Financial Institutions (OSFI) has now decided to raise a key capital requirement for large domestic banks, suggesting that the regulator is confident that the economic risks of the pandemic have largely subsided. Back in March 2020, when Coronavirus began to ravage the lives and livelihoods of millions of people, the OSFI lowered the domestic stability buffer to 1 per cent in order to provide banks with more room to absorb losses while they continue to lend through the crisis. On Thursday (17 June) the bank superintendent announced that it will raise the buffer to 2.5 per cent from October this year.
The move suggests that the regulator believes that banks have sufficient capacity to lend and are no longer at risk of experiencing a large number of defaults. “The economic and market disruptions stemming from the pandemic have abated and banks’ capital levels have been resilient,” the OSFI said in a statement. “These conditions support today’s decision to rebuild the buffer.”
According to Bloomberg Intelligence, Canada’s largest banks have about $80 billion more in common equity tier one capital in excess of the minimum regulatory requirements and about $40 billion more than the CET1 ratio of 11 per cent which they typically target. This means that the top banks in the country are awash in capital and can easily meet the adjusted requirements announced on Thursday.
“I think OSFI probably looked at the current timing and said, ‘Now’s the time, given the banks are so flush, to just nudge up this minimum level or normalize it,’” founder of Toronto-based Hamilton Capital Partners, Rob Wessel, said. He is of the view that the biggest impact of the OSFI’s recent decision is that it will limit the amount of cash that can be used by banks when making acquisitions, although this concern is limited to those banks which actually want to make acquisitions.
