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Canada’s banking regulator imposed higher capital requirements on the country’s largest banks for the second time in about six months, a signal of concern about risks
building up in the financial system.
The Office of the Superintendent of Financial Institutions said it’s lifting the domestic stability buffer to 3.5 per cent of risk-weighted assets from its current 3 per cent level. The regulator increased it by the same amount in December.
The change means the six largest domestic banks will be required to hold Common Equity Tier 1 capital of at least 11.5 per cent of risk-weighted assets. All six are currently above that level. The new requirements come into effect Nov. 1.
“Current vulnerabilities, including high household and corporate debt levels, the rising cost of debt, and increased global uncertainty around fiscal and monetary policy, coupled with Canada’s financial sector showing strength throughout the winter and spring has presented the opportunity for OSFI to build more resiliency in the system,” the bank watchdog said in a statement.
The change underscores growing anxiety in Canada about how households are grappling with the rapid increase in borrowing costs. Last month, in its annual review of the financial system, the Bank of Canada said a rising number of homeowners have mortgages that consume at least a quarter of their income, and some are relying on credit cards to meet expenses in the face of steeper payments.
OSFI sets the stability buffer based on its view of financial vulnerabilities, including levels of household and corporate debt and economic forecasts. Elevated office vacancies are also raising concerns that banks may be forced to take losses on commercial real estate loans. Commercial property represents about 10% of the loan
portfolios of Canada’s six largest banks, surpassed only by residential mortgages, according to a recent analysis by National Bank of Canada analyst Gabriel Dechaine.
While real estate risks at Canadian banks are growing, particularly in the office category, existing reserves are large enough to absorb losses, according to Bloomberg Intelligence analysts Paul Gulberg and Ethan Kaye.
The updated capital requirements apply to the two Canadian lenders on the list of global systemically important banks, Royal Bank of Canada and Toronto-Dominion Bank. It also applies to the four other institutions on OSFI’s list of domestic systemically important banks: Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada.