Canada’s financial regulator keeps a lid on bank lending, citing vulnerabilities
Unsplash Image
Canada’s financial regulator said on June 18 it will keep its Domestic Stability Buffer unchanged at 3.5 per cent, even as the central bank cut its policy rate earlier this month.
Canada’s banking regulator said Tuesday it will hold one of its buffers — the so-called Domestic Stability Buffer that only applies to Canada’s six largest banks — at 3.5 per cent of total risk weighted assets, citing vulnerabilities such as high household debt.
The Office of the Superintendent of Financial Institutions characterizes the buffer as a sort of rainy-day fund that would allow banks to weather massive loan defaults and other losses. Since the buffer was created in 2018, it has never been higher than it is right now.
The regulator’s intention is to safeguard Canada’s financial system from a major destabilizing event, but keeping the buffer relatively high is costing the economy billions of dollars in available credit. When OSFI cut the buffer at the start of the pandemic in 2020 to 1 per cent, from 2.25 per cent, it said the move would provide banks with about $300 billion of additional lending capacity.
“Holding the DSB at its current level reflects OSFI's assessment that vulnerabilities, such as high household debt, remain elevated but stable,’’ Peter Routledge, Superintendent of Financial Institutions, said in a statement .
OSFI cited concerns over future mortgage renewals at higher interest rates, along with the economic uncertainty around commercial real estate lending and geopolitical conflicts.
Yet the elevated buffer remains a headwind to Canada’s economy at a time when growth is anemic and even the Bank of Canada is cutting rates.
Asked at a June 18 press conference if the regulator considered reducing the buffer in light of the central bank’s quarter point rate cut earlier this month, Routledge said “twenty five basis points off the overnight rate, although constructive, is not a game changer in terms of overall systemic stability.”
“One of the reasons we have the buffer in place is so that regardless of monetary policy decisions made by the central bank, the financial system will operate smoothly, or at least relatively resiliently through those changes in monetary policy,” Routledge said.
