Canada’s big banks are getting the go ahead from regulators to step up lending and investment, as the Office of the Superintendent of Financial Institutions (OSFI) reduces their regulatory capital buffers.
OSFI announced the first change in the banks’ “domestic stability buffer” since mid-2023 on Friday, reducing that requirement to 3.0% of total risk-weighted assets, down from 3.5% — and, at the same time, it lowered the range for the buffer to 0% to 3% from 0% to 4%.
By reducing the buffer, OSFI is giving the big banks space to deploy additional capital, and lowering the range for the buffer is intended to send a signal that this added space won’t be disappearing anytime soon.
In a media briefing, OSFI superintendent Peter Routledge said that the decision to revise the capital buffer stemmed from a concern that the existing regulatory capital environment may have been contributing to “risk aversion” among the big banks.
Routledge suggested that the economy is at a “hinge moment” amid macro forces — such as the surge in technology investment, along with shifting trade conditions and geopolitics — and that OSFI is giving the banks a “green light” to deploy more capital as the economy adjusts to this new environment.
At the same time, he said that the regulator judged that reducing the buffer wouldn’t give up much in terms of safety for the banking system, given that the big banks are performing well, continuing to generate capital and are holding capital that’s well in excess of regulatory minimums.
“We believe the remaining buffer provides substantial resilience to the banking system. Meanwhile, today’s capital release provides an extraordinary opportunity for Canada’s six largest banks to invest in the immense potential resident in Canada’s economy,” he said.
Routledge acknowledged that regulators remain concerned about an array of economic and financial risks, but said they also believe that a 3% buffer will continue to provide plenty of protection against those risks.
And, while it’s up to the banks themselves to determine how to deploy their newly-freed up capital, “OSFI is saying very clearly that as institutions make those decisions, they have capital management certainty.”