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Federal banking regulator keeps domestic stability buffer on hold at 3.5 per cent

OTTAWA — Canada's banking regulator has left unchanged how much money the Big Six banks have to hold for a potential economic downturn.
The federal banking regulator is keeping its domestic stability buffer steady at 3.5 per cent. Bank buildings are photographed in Toronto's financial district on June 27, 2018. THE CANADIAN PRESS/Tijana Martin

OTTAWA — Canada's banking regulator has left unchanged how much money the Big Six banks have to hold for a potential economic downturn.

Peter Routledge, who leads the Office of the Superintendent of Financial Institutions, said Friday that while economic vulnerabilities are still elevated, they haven't worsened in the six months since the regulator raised the domestic stability buffer by half a percentage point to 3.5 per cent.

"We have enough insurance, we believe, for a severe but plausible downside scenario, and we wanted to communicate that with this decision," he told a media briefing.

The buffer is designed as an extra cushion of capital for banks to absorb economic shocks. It's part of the wider requirements for money banks have to have on hand, and separate from the provisions that banks set aside for potentially bad loans. 

Banks had been building up their capital in anticipation of a potential increase of the buffer to its top end of four per cent, which would have increased their total capital ratio requirement to 12 per cent. 

Routledge said the regulator believes the current capital requirements, which work out to 11.5 per cent, are adequate, but said the decision to hold was also influenced by banks already pushing their reserves well above requirements.  

"Our decision recognizes the prudent approach to capital management taken by the board of directors of Canada's systemically important banks."

He also said the last 18 months were a good opportunity to raise the domestic stability buffer because earnings were strong.

"We were buying insurance at a very cheap price."

Banks now have enough insurance to see through risks including high household debt, increased uncertainty in the housing market, material vulnerabilities in commercial real estate, and intensifying geopolitical conflicts that could impact global growth and markets, he said.

Routledge also noted that there have been some positive developments since the regulator's last decision in June, including improvements in the household debt-to-income ratio and in the falling rate of inflation.

The domestic stability buffer applies to Canada's six largest banks, known as domestic systemically important banks.

It is reviewed and set every June and December, but can be changed at other times if needed. 

This report by The Canadian Press was first published Dec. 8, 2023.

The Canadian Press