Office of the Superintendent of Financial Institutions
Thank you everyone and welcome to our June 2022 rate-setting announcement for the Domestic Stability Buffer, or DSB.
The DSB is an important policy tool that helps ensure the stability of Canada’s financial system and requires Canada’s largest domestic systemically important banks (D-SIBs) to build up a capital buffer as vulnerabilities grow. This buffer can then be released during challenging times, allowing banks to cover losses and continue to lend to businesses and households.
Today, OSFI announced that the DSB will remain at 2.5% of total risk-weighted assets. Keeping the DSB at 2.5% reflects our assessment that systemic vulnerabilities remain elevated and have increased, while near-term risks are moderate but rising given an environment of heightened uncertainty.
As noted at the last DSB announcement in December 2021, these vulnerabilities are driven primarily by historically elevated Canadian household indebtedness and asset imbalances.
Household indebtedness continues to play an especially important role in our DSB analysis. While there has been some recent cooling of home prices in certain markets across Canada, prices are still up significantly year over year. Ongoing high consumer debt levels may leave Canadians financially stretched in a downturn, or possibly more vulnerable to increases in borrowing costs as interest rates and the cost of living rise.
More recently, geopolitical and external vulnerabilities have increased due to the conflict caused by Russia’s invasion of Ukraine, the impact of recent COVID-related lockdowns in China, ongoing global supply chain challenges and persistent inflationary pressures. These risks are also being priced into financial markets, which have exhibited elevated volatility in recent months.
Despite these headwinds, Canada’s domestic systemically important banks – or D-SIBs – have performed well over the past year, with manageable credit losses and consistent earnings performance. The D-SIBs, however, have deployed a significant amount of the capital built up during the pandemic towards acquisitions and the return of capital to common shareholders.
The past two years have reinforced the prudential requirement for D-SIBs to be prepared for economic shocks of varying degrees and frequencies. In the context of increased uncertainty, we expect banks to exercise vigilance and heightened prudence in their capital management practices with a view to preserving capital.
Robust and usable capital buffers prepare the financial system to weather economic and financial volatility characterized by unusual severity. Since its creation in June 2018, the DSB has proved its effectiveness as a counter-cyclical buffer that helps mitigate the impact of such volatility. The DSB also obliges D-SIBs to contribute to economic stability by expanding their capacity to absorb losses and thereby sustain lending activity.
Against this background, OSFI is reviewing the current design and range of the DSB as part of its work to ensure the long-term effectiveness of the capital regime. We expect to complete this work in the fall 2022.
Our aim is to ensure that the DSB adds resilience to the Canadian financial system, by helping ensure that Canada’s D-SIBs have adequate capital on hand in an era of intensifying financial uncertainty. The DSB review flows from OSFI’s mandate to contribute to public confidence in the Canadian financial system.
Thank you. I will now turn it over to my colleague Sara Tubman to deliver remarks in French. Afterward, we will take your questions.