OSFI slashes banks’ required capital buffer

By James Langton | March 13, 2020 | Last updated on March 13, 2020
2 min read
Toronto skyline in financial district
© Elijah Lovkoff / 123RF Stock Photo

Federal banking regulators are calling on the major banks to deploy their capital buffers and suspending plans to adjust the mortgage stress test in an effort to bolster the stability of the financial system amid the Covid-19 outbreak.

The Office of the Superintendent of Financial Institutions (OSFI) announced that it’s slashing the capital buffer required for domestic systemically important banks (D-SIBs) from 2.25% of risk-weighted assets to 1%, which will support an estimated $300 billion in added lending capacity.

The buffers, established by global regulators in the wake of the financial crisis, are designed to push the banks to accumulate capital during good times, which they can then draw on when conditions become tougher.

OSFI said the decision to lower the buffer “is being taken in order to support D-SIBs’ ability to supply credit to the economy during an expected period of disruption related to Covid-19 and market conditions.”

The regulator said that the banks are encouraged to use the freed up capital and their liquidity buffers, if necessary.

It also said that banks are not to deploy the capital to increase distributions to shareholders or engage in share buybacks.

“OSFI has today set the expectation for all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being,” it said.

OSFI also said it will continue to monitor the buffer.

“There remains capacity to respond to further stresses,” it said, adding that it won’t increase the buffer again for at least 18 months.

Additionally, the regulator said that, until markets stabilize, it’s “suspending all of its consultations and policy development on new or revised guidance,” including the proposed changes to the stress test for uninsured mortgages.

“As a result, the benchmark rate as currently published by the Bank of Canada will remain in force until further notice,” it said.

Correction: A previous version of this article said OFSI was calling on banks to freeze dividends.

James Langton headshot

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.