News gives a telling signal of regulator's confidence in economic outlook
Canada’s banking regulator is keeping the domestic stability buffer (DSB) unchanged at 3.5% of risk-weighted assets for the country’s largest banks, reaffirming confidence in their resilience despite ongoing geopolitical and economic tensions.
The Office of the Superintendent of Financial Institutions (OSFI) announced Thursday that the DSB, a key capital requirement meant to protect banks from economic shocks, will not be adjusted for now. A Bloomberg report noted that the decision signals that financial institutions have so far weathered the economic challenges posed by trade conflicts, higher tariffs, and inflationary pressures.
“Conditions thus far are better than our planning assumption earlier in the year,” said superintendent Peter Routledge during a press briefing. “We take only a moderate level of comfort from that and we remain focused on downside scenarios.”
Banks remain profitable
OSFI said Canadian banks are currently well-capitalized. The average common equity tier 1 (CET1) ratio – a key measure of a bank’s ability to absorb losses – sits at 13.6%, an increase of nearly 30 basis points in six months. This is slightly above the global median of 13.4% for systemically important banks.
“The DSB is a resilience buffer, and we don’t set that giving any consideration to competitive issues,” Routledge stated. “We set it giving consideration to what the impacts of a stress scenario would have on the balance sheets of banks.”
The CET1 requirement remains at 11.5%, though several financial analysts suggest it could be lowered in future reviews. Canadian Imperial Bank of Commerce (CIBC) analyst Paul Holden noted that lighter regulation in the US could influence Canadian policy. “We would not be surprised if the minimum common equity tier 1 requirement set by OSFI is reduced at some point in the future,” he said.
Global comparisons and flexibility
Canada’s buffer, increased from 2.5% in recent years, exceeds the 0–2.5% range established under the Basel III international banking standards. However, OSFI expanded the allowable range to 0–4% to allow for more flexibility in responding to changing conditions.
The regulator emphasized it is closely monitoring risks such as high household debt, deteriorating real estate values, and ongoing economic uncertainty. “Given the unusual degree of economic uncertainty at present, OSFI stands ready to lower our capital expectations of Canada’s systemically important banks as financial conditions warrant,” Routledge said.
The DSB decision affects major banks including Royal Bank of Canada, Toronto-Dominion Bank, Scotiabank, Bank of Montreal, CIBC, and National Bank of Canada. OSFI reviews and announces changes to the buffer level twice annually.
