Key messages
- We have set the Domestic Stability Buffer to 2.50%, effective October 31, 2021.
- This decision reflects our assessment that key vulnerabilities are increasing and remain elevated, while economic and financial conditions have improved from the stressed levels observed at the onset of the pandemic.
- The March 2020 reduction in the DSB level worked as intended, acting as a shock absorber for the economic and market disruptions over the past year. These disruptions have abated and capital levels at D-SIBs have been resilient.
- The DSB continues to support an effective capital regime, where banks set aside capital in response to systemic vulnerabilities while still having capacity to lend to credit-worthy borrowers and support the economic recovery.
Good morning.
As you know, in March 2020 OSFI announced a number of measures in response to the COVID-19 pandemic.
One of these measures was to lower the Domestic Stability Buffer, or DSB, from 2.25% to 1.00% of risk-weighted assets, for a period of at least 18 months. We took this course of action to ensure that the Domestic Systemically Important Banks—D-SIBs—could use their capital to absorb potential losses and continue to supply credit during a period of expected economic disruption.
At our regularly scheduled reviews of the DSB in June and December 2020 we maintained the DSB at 1.00%, given the effectiveness of the March 2020 release in supporting the resilience of the Canadian financial system and the overall economy.
That brings us to today. This morning, we are announcing that we have set the DSB at 2.50% of risk-weighted assets—an increase of 1.50%— bringing the DSB to the upper end of its range. This change will become effective October 31, 2021.
We have made this decision based on our assessment that key vulnerabilities have persisted and in certain respects have increased since the DSB release last year. At the same time, we see that economic recovery is underway and banks’ capital levels have been resilient. Rebuilding capital buffers now – when conditions are improving and vulnerabilities remain elevated – is prudent and reinforces the financial system’s capacity to absorb unexpected losses.
Elevated vulnerabilities persist in the areas of Canadian household and corporate indebtedness as well as asset imbalances. Debt levels have grown relative to pre-pandemic levels, driven by robust mortgage credit growth. Moreover, the household debt-to-income ratio is again trending up, after a sharp drop last year when government income support programs were implemented.
We have also seen a rise in highly-leveraged borrowers entering the housing market, as reflected in the share of new mortgage loans exceeding 4.5 times a borrower’s income. Meanwhile, Canadian house prices have risen steeply over the past year across most markets, which contributes to asset imbalances and leaves the financial system vulnerable to potential price declines.
Among Canadian corporates, we observe that debt growth has stabilized recently and liquidity has been improving. However, debt levels remain historically elevated and weakness continues to be observed in the sectors most impacted by the pandemic.
Looking globally, vulnerabilities have also increased with private-sector debt growth continuing to outstrip income in recent years, alongside rapid growth in public-sector debt in response to the pandemic. Across countries, the pace of economic recovery is uneven, with ongoing supply chain concerns, and signs that strong investor risk appetite has contributed to imbalances in asset prices.
These vulnerabilities are not new: most are persistent and elevated, and have been on our radar for some time. Together, they reflect a set of conditions that increase the potential for negative impacts to Canada’s financial system under any future economic shocks.
Fortunately, we see that economic recovery is underway. Fiscal and monetary policy measures have helped mitigate the impacts of the pandemic, and financial and credit conditions have improved over the past year. Further, capital strength demonstrated by Canada’s banks since March 2020 positions them well to continue lending to households and businesses to support the recovery.
On balance, we assess that a DSB set at 2.50% continues to support an effective capital regime, where banks set aside capital in response to vulnerabilities, while still having capacity to lend to credit-worthy borrowers and support the economic recovery.
Our next scheduled semi-annual DSB review is December 2021. As always, we will continue to monitor the environment closely and make further adjustments to the DSB as conditions warrant.
We remain committed to setting the DSB in a transparent manner to ensure it is widely understood by markets. In doing so, we expect that decisions to increase or draw on buffers when needed will be seen as normal stabilizing actions and a sign of a well-functioning and effective capital regime. These are key steps towards preserving resilient banks and contributing to financial stability.
Thank you.