OSFI has decided to set the level of the Domestic Stability Buffer at 2.00% of total risk-weighted assets, as calculated under the Capital Adequacy Requirements Guideline. The buffer has been set at this level, with effect from October 31, 2019. The Domestic Stability Buffer applies only to the federally regulated financial institutions that have been designated as domestic systemically important banks (D-SIBs).
In December 2018, the Domestic Stability Buffer had been set at 1.75%, with effect from April 30, 2019. As of June 2019, the federally regulated financial institutions that have been designated as D-SIBs are Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank. This increase in the buffer (to 2%) reflects the OSFI assessment that, on balance, the identified systemic vulnerabilities to D-SIBs in Canada remain elevated while economic conditions continue to be accommodative. The key vulnerabilities include Canadian household indebtedness, asset imbalances in the Canadian market, and Canadian institutional indebtedness. Household debt-to-income ratio has remained high since the last domestic stability buffer decision, housing market uncertainty remains elevated, and risks related to non-financial corporate debt have continued to grow. Against this backdrop, a favorable credit environment and stable economic conditions continue to provide a window of opportunity for D-SIBs to increase their capital holdings.
The Domestic Stability Buffer contributes to D-SIBs' resilience to key vulnerabilities and system-wide risks, thus contributing to financial stability. OSFI reviews and sets the level of the Domestic Stability Buffer on a semi-annual basis (June and December), based on its ongoing monitoring of federally regulated financial institutions as well as system-wide and sectoral developments. Decisions on the calibration of the buffer are based on the OSFI supervisory judgment, are informed by its monitoring and analytical work on a range of vulnerabilities, and are made in consultation with the federal financial regulatory partners of OSFI. OSFI applies a variety of qualitative analysis and quantitative tools to the determination of the buffer, including consideration of exposure trends, financial and macro economic indicators, stress testing and other supervisory information.
Keywords: Americas, Canada, Banking, Basel III, Domestic Stability Buffer, D-SIBs, Capital Adequacy, Systemic Risk, OSFI
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