Canadian regulator addresses systemic risk concerns

Canada’s financial regulator is raising the amount of capital major banks need to hold over concerns of high household debt levels and other systemic risk vulnerabilities.

“Things have moved so significantly, the vulnerabilities have grown and the risk landscape is changing so quickly, that we issued or updated the annual risk outlook,” said OSFI chief risk officer Angie Radiskovic.

The Office of the Superintendent of Financial Institutions said that the domestic stability buffer will go up by half a percentage point to 3% cent as of 1Febuary, 2023. It also increased the possible range of future adjustments to between 0% and 4%, rather than the previous top end of 2.5%.

The adjustment comes as debt levels remain fairly stable while debt service costs are on the rise said.

“Clearly, we’re in a risk environment now where levels of indebtedness have grown. We’ve got high inflation, we’ve got rising interest rates and a lot of our thinking is holding around those types of risks,” Radiskovic said.

By raising the amount of money banks need to set aside, it provides the regulator with more flexibility to lower the capital requirements when a downturn hits to give banks access to potentially needed extra funds.

Radiskovic said the adjustments come as the economic risk profile has changed considerably this year, enough to prompt the regulator to release an unplanned update to its outlook in October.

Radiskovic said the buffer increases will boost the stability of major banks and public confidence in the financial system.

The stability buffer, which applies to domestic systemically important banks, was launched in 2018 and is set twice a year, but can be changed at other times if needed.

The latest increase will put the bank total common equity tier one ratio needed at 11% when it comes into force in February.

The increase gives banks less than the usual four months to increase their capital buffers.