Business and financial district in a city with pillars

Federal banking regulators are leaving the capital buffers for the Big Six banks unchanged at 1.0% of risk-weighted assets, noting that banks are keeping credit flowing to a battered economy.

The Office of the Superintendent of Financial Institutions (OSFI) reviews the domestic stability buffer (DSB) required of the large, systemically important banks in June and December. This year, however, the Covid-19 crisis prompted the regulator to slash the buffer from 2.25% to 1.0% on March 13 to give banks more flexibility to cope with the fallout from the growing pandemic.

“This decision provided banks with roughly $300 billion in lending capacity to support the ongoing flow of credit to Canadians,” it said.

As a result, the large banks “have continued to extend business and consumer loans, and that lending remains within the estimated increased capacity,” OSFI noted.

The DSB is designed to be built up during periods of strength so that banks can draw on it when operating conditions are tougher.

Today’s decision to leave the buffer unchanged at the reduced level “reflects OSFI’s assessment that the current DSB level remains effective in supporting the resilience of the Canadian banking system and the overall economy,” the regulator said in a statement.

OSFI also said that the quantity and quality of capital held by the big banks “remains strong.”

It reported that the average common equity tier 1 capital ratio is 11.2%, which remains well above its expectation of 9% for the large banks.

“The recent DSB release is working as intended, acting as a stabilizing tool to support banks’ ability to absorb losses and to continue lending to Canadians. This is a sign of a well-functioning and effective capital regime,” said Jamey Hubbs, assistant superintendent, deposit-taking supervision sector at OSFI.

At the same time, OSFI noted that “vulnerability levels remain elevated against a backdrop of heightened uncertainty.”

When it cut the buffer in March, OSFI indicated that it would not raise the buffer again for at least 18 months; however, it could consider further reductions if conditions warrant.

In its letter to banks, OSFI noted that it continues to see domestic vulnerabilities, including high consumer and corporate debt levels and asset imbalances, along with external risks.

“Global vulnerabilities continue to contribute to the possibility of a spillover of external risks into the Canadian financial system,” it said.

In addition to reducing the banks’ capital buffers, OSFI has made a series of other moves to regulatory requirements in an effort to give banks more room to operate during the pandemic.