The Office of the Superintendent of Financial Institutions’ (OSFI) decision to reduce the big banks’ capital buffer has roughly the same impact on credit growth as a 25-basis point (bps) rate cut by the Bank of Canada, says Scotia Economics — coming at a time when it’s expected that the central bank’s next move will be a rate hike, that decision may also impact monetary policy.
Last week, OSFI lowered the domestic stability buffer (DSB) from 3.5% to 3%, citing its desire to support the big banks’ ability to lend and invest.
“While this policy change focuses on the supply of credit to the economy, it is analogous to a drop in the Bank of Canada’s policy rate that stimulates the demand for credit,” Scotia said in a research note.
Indeed, it estimates that the buffer change equates to approximately a 25-bps rate cut.
“Given our view that the Bank of Canada will need to raise its policy rate late this year, this regulatory change may need to be considered by the BoC as it sets its policy rate,” it said.
However, in the current economic environment — marked by elevated uncertainty due to U.S. trade policy, the conflict in the Middle East and erratic U.S. policy generally — the capital buffer adjustment may not impact economic growth as much as a rate cut, the report noted.
“Moreover, liquidity is currently scarce, and that may limit a bank’s ability to fund asset growth even if they have the capital space to do so,” it said. “Because of this, it is perhaps best to think of our results reflecting an upper-bound of the impact.”