Banking regulators’ decision to raise the capital buffer on Canada’s big six banks amid ongoing concerns about economic conditions is a positive for the banks, as it will likely spur them to further build up their capital strength, says Moody’s Investors Service.
In a new report, the rating agency said that the 25-basis-point increase in the domestic stability buffer imposed by the Office of the Superintendent of Financial Institutions (OSFI) on the big banks earlier this week is “credit positive for [the banks] because it will require them to maintain higher capital stocks, increasing protection for bondholders against unexpected losses.”
Moody’s noted that, while the banks that are affected by the decision — Bank of Montreal, Bank of Nova Scotia, CIBC, Royal Bank of Canada, TD Bank and National Bank of Canada — already have capital on hand that exceeds the new minimums (which take effect Oct. 31), it expects the banks to build up their capital reserves even further to maintain their cushion above regulatory minimums.
As it stands, the banks all currently exceed their minimum capital requirements by between 110 and 200 bps, Moody’s reported, adding that the banks’ “current capital levels are adequate given their high asset quality and ability to generate capital.”
The decision to raise the stability capital buffer to 2.00% of total risk weighted assets (RWAs) from 1.75% as of Oct. 31 signals OSFI’s concerns about high Canadian consumer debt levels, institutional debt and asset imbalances in the Canadian market, Moody’s said.
“We expect the banks’ current prudent capital management practices to continue,” it added.