Written by 1:24 PM Government and Regulation Views: 371

OSFI holds domestic stability buffer at 3.5%, cites stable but lingering risks

Canada’s banking regulator announced no change to the amount of capital banks must keep on hand to cover potential future losses.

OSFI Domestic Stability Buffer

The Office of the Superintendent of Financial Institutions (OSFI) left the Domestic Stability Buffer (DSB) at its current rate of 3.5%, which has been in effect since November 1, 2023.

OSFI says the decision reflects confidence in the strength of Canada’s largest banks while acknowledging the lingering economic and financial risks.

“…risks facing Canada’s financial system remain generally stable, and systemically important banks have maintained an adequate level of capital to address emerging risks,” OSFI said in its announcement.

Introduced in June 2018, the DSB requires Canada’s Big 6 banks to hold additional capital as a safeguard against economic downturns. The DSB works alongside the Common Equity Tier 1 (CET1) ratio, a measure of a bank’s core capital relative to its risk-weighted assets.

The CET1 minimum is set at 4.5% of risk-weighted assets, but when combined with the DSB, the capital conservation buffer, and the surcharge for large banks, the effective CET1 requirement reaches 11.5%. Despite this, Canada’s largest banks consistently report CET1 ratios above 12%, with some exceeding 14%.

OSFI still monitoring ongoing vulnerabilities

Superintendent Peter Routledge explained OSFI’s decision to keep the DSB at 3.5%, citing stable yet elevated systemic vulnerabilities, low near-term risks to bank capital, and the strong capital levels currently maintained by banks.

He noted that these conditions are expected to hold steady over the next six months.

“Recent stress tests and scenario analysis are also supportive of no change to the buffer,” he said.

However, Routledge did point to some “important vulnerabilities” that he said OSFI is continuing to monitor closely.

Household indebtedness remains elevated, with the debt service ratio still near record highs.

“Looking ahead, we expect further pressure on households as mortgages in 2025 and 2026 will renew at higher interest rates,” Routledge said. “However, this is less concerning than in June since rates have declined and Canadian homeowners have weathered the current credit cycle well.”

Routledge also noted uncertainty around real estate valuations despite recent interest rate declines, warning that a sharp correction could increase credit risk in real estate-backed lending.

Finally, he pointed to rising non-financial corporate debt relative to GDP, as well as increasing geopolitical tensions and global policy uncertainty—though these factors have had little direct impact on Canada’s financial system so far.

Visited 371 times, 1 visit(s) today

Last modified: December 17, 2024

Steve Huebl is a graduate of Ryerson University's School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.

Close