New OSFI directive to guard banks against domestic risks

The Office of the Superintendent of Financial Institutions (OSFI) is requiring the country’s lenders to disclose their reserved funds, including additional capital worth 1.5 % of assets for an adjustable “domestic stability buffer.

“Not only will this give more insight into the overall amount of capital being set aside by the banks, it will contribute to broader financial stability by providing information on the key domestic risks to which Canada’s largest banks are exposed,” OSFI said in a statement.

The six largest banks in Canada have to keep Common Equity Tier 1 (CET 1), a level of high-quality capital that includes retained earnings. Additionally, OSFI had previously disclosed that the CET 1 level for a domestic systemically important bank in Canada was 8% of a lender’s risk-weighted assets.

However, in a report by Financial post this week, OSFI recently required banks to set aside capital worth another 1.5 % of assets for an adjustable “domestic stability buffer.”  The reserve, similar to additional layers of capital that have been utilized by regulators abroad, will force the regulator’s capital requirement for the banks to grow by 9.5 %, and would be mainly disbursed to guard against “domestic risks.”

“Examples of risks that the domestic stability buffer is intended to protect against could include Canadian consumer and institutional indebtedness, or any other risks that could have a system-wide impact,”

OSFI did not specify the alterations concerning the domestic buffer, but said that they regularly update the public regarding capital requirements for the domestic stability buffer and the related risks every June and December via its website.

While the announcement came as a surprise, it seems that OSFI’s directive will not affect Canadian banks for now.


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