Faced with the high level of indebtedness of Canadians, rising interest rates and economic uncertainty, the banking regulator is once again increasing its capital requirements for the six major banks in the country.
The Office of the Superintendent of Financial Institutions Canada announced on Tuesday that the rate of the Domestic Stability Reserve has been raised by 50 basis points to 3.5%.
This decision has an impact on the regulator’s expectations in terms of reserves aimed at ensuring adequate capitalization of banks.
Analysts were quick to note that the minimum regulatory capital ratio to maintain rose from 11% to 11.5%.
This ratio measures the ability of financial institutions to absorb shocks. The authorities are adjusting their requirements so that banks build up reserves reflecting the growth of potential vulnerabilities.
Banks can draw on their reserves when conditions get tough, giving them more funds to continue lending to businesses and households and absorb losses.
The objective of Tuesday’s announcement is to strengthen the resilience of the Canadian financial system.
This is the third time in two years that the regulator has done something like this. The Domestic Stability Reserve rate was also increased in 2021 and 2022.
In March 2020, however, the Domestic Stability Reserve rate was lowered in response to the COVID-19 pandemic. “This allowed Canadian banks to absorb potential losses and continue to support the economy,” said analyst Scott Chan of Canaccord.
This expert points out that the six major Canadian banks are all well capitalized today and all already meet the minimum capital ratio required. They have therefore accumulated enough excess capital and have already set themselves the goal of operating with a ratio of more than 12%.
As a result, his colleague John Aiken, at Barcalys, stresses that the authorities’ decision will not force banks to raise additional capital, especially since the new requirements will not come into force before the start of the banks’ next financial year, that is to say at the beginning of November.
John Aiken nevertheless finds the action taken by the regulatory body a bit curious. “While it is unsurprising that the regulator is focusing on capital levels in the current environment, the decision may need to be quickly reversed if a slowing economy were to put pressure on earnings and capital levels. »
The more banks are required to maintain high reserves, the less resources they have at their disposal to make acquisitions, enhance the dividend paid to their shareholders, or buy back shares for cancellation.
The Office of the Superintendent of Banking Institutions Canada sets the Domestic Stability Reserve rate on a semi-annual basis. The next revision is expected in December.
