shrunk their reserves which they’ve maintained as a cushion to better protect against the risks anticipated under the current economic conditions. In June this year, the Office of the Superintendent of Financial Institutions (OSFI) set the capital buffer for the country’s big banks at 2.5 per cent, which came into effect at the end of October.
Now, the financial watchdog has decided to maintain the policy tool at the set level as Systemic vulnerabilities remain elevated. According to the OSFI, as Canada’s largest banks continue to be in robust financial shape, near-term risks currently remain stable. However, considering market vulnerabilities such as household indebtedness, the organisation noted that housing-related asset imbalances remain high.
“Today’s decision to keep the Domestic Stability Buffer at 2.50 per cent reflects OSFI’s full analysis of both short-term risks and longer-term vulnerabilities in the Canadian financial sector as well as the broader economy,” Jamey Hubbs, the assistant superintendent of the OSFI’s deposit-taking supervision sector, said in a release. “A DSB at this level is a prudent and appropriate measure given the current environment.”
According to a report published by RBC Economics, as in many developed economies, housing-related debt in Canada rose to a record high, pushing the debt-to-income ratio increasing to 177.2 per cent during the third quarter. This was largely a result of ultra-low interest rates and government support measures which expanded household incomes. Accordingly, the capital buffer imposed by the OSFI is part of an overall supervisory strategy which aims to ensure banks remain resilient against market vulnerabilities, including loan defaults. While the DSB is reviewed every June and December, the OSFI may change it at other times if the circumstances call for it.
