OSFI increases the capital buffer for large banks to 3% as household debt risks increase

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The financial watchdog also increased the range of the capital buffer, or policy tool to keep the country’s financial stability in check, from zero to four percent from February 2023, from zero to 2.5 percent.

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“This new level reflects our observations and high levels of systemic vulnerabilities have persisted and in some cases increased in recent quarters,” OSFI Assistant Superintendent Angie Radiskovic said at a December 8 news conference. “Canadian household debt-to-income levels are approaching record highs, exacerbated by soaring debt burdens as interest rates have risen. Although house prices are starting to fall, they remain high, taking into account higher mortgage rates.”

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Radiskovic added that highly indebted companies are more vulnerable to economic shocks in an environment of rising interest rates and that global government debt is higher than before the pandemic.

“Finally, geopolitical uncertainty remains high, increasing the likelihood of a global slowdown spilling over to Canada,” Radiskovic said.

OSFI’s decision also took into account stress testing different scenarios and considering the high-profile acquisitions some of Canada’s Big Six banks made this year. Radiskovic said banks are required to address all operations and cover all risks they are exposed to, including forward-looking statements and contingency plans in their capital planning strategy.

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