OSFI statement supporting the use of capital buffers

OTTAWA, ON, July 15, 2020 /CNW/ – Today the Office of the Superintendent of Financial Institutions released the following statement…

OTTAWA, ON, July 15, 2020 /CNW/ – Today the Office of the Superintendent of Financial Institutions released the following statement supporting the use of capital buffers:

OSFI strongly supports the recent statements issued by the Basel Committee on Banking Supervision and the Financial Stability Board reinforcing the usability of banks’ capital buffers.

SFI requires banks to build up capital buffers in good times so that they are available for use during periods of stress. Capital buffers allow banks to absorb losses while also encouraging them to continue to provide loans and financial services during times of economic stress. Using capital buffers to absorb losses and support lending is consistent with a well-functioning capital regime. It is also consistent with the design and intended functioning of the Basel III framework, an international agreement to strengthen the regulation, supervision and risk management of banks.

Canadian banks entered this period of economic uncertainty resulting from the COVID-19 pandemic from a position of strength because they had built up capital in several layers of buffers. For example, the Domestic Stability Buffer (DSB) is one of the capital buffers that Canada’s six largest banks have in place to guard against risks.

On March 13, as signs of strain due to COVID-19 began to emerge, OSFI reduced the DSB from 2.25% to 1% of total risk–weighted assets. This decision provided banks with roughly $300 billon of additional lending capacity. On June 23, OSFI announced that the DSB would remain at 1%, unchanged from the level set on March 13, reflecting OSFI’s assessment that the current DSB level remains effective in supporting the resilience of the Canadian banking system and the overall economy. OSFI will continue to monitor economic and financial conditions, vulnerabilities and signs of risks to the banking system, and the impact of COVID-19 policy responses. If conditions warrant, OSFI is prepared to release the DSB further.

Following the pandemic, banks will be given ample time to restore their capital buffers. This is why we indicated in March that any increases to the DSB will not take effect for at least 18 months following the release. This restoration of capital buffers will be gradual, transparent and measured. 

The Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB) play key coordination roles in the development of regulatory frameworks for banks and the promotion of a resilient global financial system. OSFI is an active participant in these international standard-setting forums. In addition to the BCBS and the FSB, a number of regulatory authorities in other jurisdictions have also recently reinforced that buffers are available for use in times of stress in order to support lending.

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SOURCE Office of the Superintendent of Financial Institutions