Thank you everyone and welcome to today’s announcement regarding the Domestic Stability Buffer, or DSB. Today, OSFI announced that the DSB will remain at 2.5% of total risk weighted assets, unchanged from the level set in June. This reflects our assessment that systemic vulnerabilities remain elevated, while near-term risks are moderate and relatively stable on balance.
In June, OSFI raised the level of the DSB from 1.00% of risk-weighted assets as set in March 2020 at the outset of the pandemic, to its current level of 2.5% effective October 31, 2021. This action was taken in recognition of elevated and rising vulnerabilities, reduced uncertainty related to the pandemic and resilient capital levels of our domestic systemically important banks, or D-SIBs.
Since then, Canadian household indebtedness has remained at high levels and housing-related asset imbalances have increased modestly as home prices continue to grow. These vulnerabilities are not new. High levels of indebtedness mean households may be more financially stretched in a downturn, or more vulnerable to an increase in borrowing costs. For example, recent evidence suggests that variable-rate mortgages have become more popular, especially among first-time Canadian homebuyers.
We continue to monitor these vulnerabilities closely, including impacts from the pandemic as well as risks presented by the ongoing imbalance of housing supply relative to demand in certain cities. Finally, from an external perspective, vulnerabilities relating to global debt levels and weakness in supply chains also continue to pose a risk of spillover to Canada.
On the other hand, as was the case in June, short-term risks to the financial system are, for the most part, moderate and stable. Most importantly, financial resilience of Canada’s largest banks continues to be robust. We also observe that the economic recovery is progressing, which is encouraging, although we acknowledge ongoing pandemic-related uncertainty and bouts of volatility in financial markets.
Given this balance of current risks and vulnerabilities, our view is that the recently effected increase in the level of the buffer to 2.5% is prudent and appropriate to address potential concerns in the near term.
I would like to take a moment now to return to the purpose of the DSB. The DSB is part of a comprehensive capital regime that supports banks’ resilience to vulnerabilities. It is intended to be built up in good times in response to vulnerabilities, and used in bad times to absorb losses and support lending. As we saw during the pandemic, it was important to have a buffer of usable capital that could quickly be released to provide ample support to banks’ lending capacity.
Currently we are at the maximum of the DSB range that we established in June 2018. Looking ahead, as part of our ongoing work to ensure the long-term effectiveness of the capital regime, we plan to review the DSB’s design and range. This is in line with OSFI’s mandate to contribute to public confidence in the Canadian financial system.
As always, we continue to monitor economic and financial conditions as well as risks and vulnerabilities to the banking system and may take further action should conditions warrant.
I will conclude by echoing earlier comments made by the Superintendent regarding OSFI’s continued expectations of responsibility, prudence and sound judgement on the part of boards of directors and senior management at federally regulated financial institutions. When contemplating decisions that affect capital levels, we expect leadership teams to weigh all internal and external factors—including OSFI expectations and requirements—before arriving at a final course of action.
Thank you. I will now turn it over to my colleague Sara Tubman to deliver remarks in French. Afterward, we will take your questions.