The Office of the Superintendent of Financial Institutions has held banks’ domestic stability buffer at 3.5% of risk-weighted assets.Tijana Martin/The Canadian Press
Canada’s banking regulator has maintained the capital cushion the country’s largest lenders must keep in reserve, even as calls mount to free up lending capacity to help boost the economy amid the U.S. trade war.
The Office of the Superintendent of Financial Institutions, or OSFI, said Thursday it is upholding the higher capital levels as a defence against elevated risks to the financial system, including high household debt and tariff pressures. But some analysts have said that lowering the buffer could help free up loans for businesses as Prime Minister Mark Carney takes aim at bolstering Canada’s waning productivity.
OSFI said the domestic stability buffer – capital that banks must maintain to endure the blow of an economic downturn – will remain at 3.5 per cent of a bank’s risk-weighted assets. The regulator has held this level since June, 2023, after a series of increases, which required banks to hold onto billions of dollars in excess cash.
The regulator raises the buffer during periods of relative stability to prompt banks to build reserves. It lowers the buffer, known as the DSB, during economic downturns to unleash that excess capital and allow the banks to continue lending to consumers and businesses during tough times.
“There is no compelling reason to lower the DSB,” OSFI superintendent Peter Routledge told reporters. “The economy is doing better than we thought, the banks continue to deliver very good earnings, they continue to return capital to shareholders at a healthy rate, and that’s not a bad thing from our perspective.”
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Critics say this extra cash could instead be released to allow banks to deploy it to businesses looking to invest in major projects and growth strategies. Ottawa’s federal budget included several measures to build major infrastructure projects.
“With the federal budget initiatives requiring significant capital investment, and a more competitive global environment, we believe OSFI will explore easing the DSB with either its December 2026 or June 2027 update,” CIBC analyst Paul Holden said in a note to clients.
While OSFI can change the DSB at any time, it announces a decision to change or hold the level twice a year. The requirement applies to financial institutions that are considered domestic systemically important banks, or DSIBs, including Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada.
In recent years, OSFI hiked the buffer twice to build a bigger safety net. To do so, the regulator increased the potential range of the buffer to between 0 and 4 per cent, up from a maximum of 2.5 per cent. This signalled to lenders that the regulator could require them to hold onto significantly higher levels of cash.
In advance of Thursday’s announcement, BMO analyst Sohrab Movahedi said OSFI should lower the range to make Canadian banks more competitive relative to global peers.
“A reduced upper bound on the DSB would help level the playing field,” Mr. Movahedi said in a note to clients in November. “It should also mean the Canadian DSIBs would similarly lower their management targets, which would free capital for credit expansion (and support the structural bias towards domestic capital formation embedded in the recently announced federal budget in Canada).”
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Last month, OSFI said it is considering lowering individual capital requirements for loans for certain corporate and real estate properties in a bid to build lending capacity.
But the domestic stability buffer also affects the overall minimum capital levels that a bank is expected to hold. The common equity tier 1, or CET1, ratio – a measure of a lender’s ability to absorb losses – remains at 11.5 per cent.
Typically, banks choose to hold on to more cash than required to avoid dropping below the regulatory minimum. Sudden issues could arise that cause a bank’s CET1 ratio to fall. If levels were to drop to 11.4 per cent or lower, OSFI would require a bank to undertake a remediation plan – which banks would prefer to avoid.
But Mr. Routledge said the banks are holding on to cash that far exceeds the minimum level. The Big Six banks have an average CET1 ratio of 13.6 per cent, well above OSFI’s minimum requirement, according to the regulator.
This means that the banks have chosen to hold on to a capital cushion of about $60-billion. Even if OSFI were to raise requirements to the upper range of the DSB, the lenders would still have a sizeable pile of excess cash. When compared to the highest point in the range, the banks hold more than $45-billion in excess capital, Mr. Routledge said.
“On the basis of those facts and that evidence, we think Canadian systemically important banks have ample capital capacity to continue to grow and profit from their growth,” Mr. Routledge said.