OSFI Raises Banks’ Capital Requirement As Pandemic Retreats

Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is boosting the capital reserve requirements for the country’s big banks as the economic recovery from COVID-19 accelerates.

OSFI raised the "Domestic Stability Buffer" (DSB) to 2.5% of risk-weighted assets, up from the current 1% threshold. The increase takes effect on October 31, in line with OSFI’s pledge not to increase the buffer until this fall.

OSFI said the change was prudent given the evolving environment, as economic shocks from the pandemic have eased. The regulator highlighted that key vulnerabilities remain, in particular elevated levels of household and corporate debt, which factored into its decision to have the banks increase their capital reserves.

The move comes a little more than a year after OSFI abruptly slashed the DSB to 1% in the early days of the pandemic, after earlier outlining plans to increase the buffer to 2.25%.

The cut was meant to ensure banks could pump adequate amounts of cash into the economy through loans to individuals and businesses.

Over the course of the pandemic, the big banks have been steadily building up their capital levels, in part due to restrictions OSFI put on share buybacks and dividend increases.

However, OSFI said it will take its time before loosening the rules to allow the big banks to once again hike dividends and buy back stock.