OSFI has set the Domestic Stability Buffer, or DSB, at 2.25% of total risk-weighted assets, with effect from April 30, 2020. The buffer is applicable to domestic systemically important banks (D-SIBs) and is calculated as specified under the Capital Adequacy Requirements (CAR) Guideline. As of December 2019, six federally regulated financial institutions have been designated as D-SIBs—namely, 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 reflects the view of OSFI that key vulnerabilities to D-SIBs in Canada remain elevated and show signs of increasing in some cases. In addition, global vulnerabilities related to ongoing trade tensions and rising leverage are growing, which could increase the chance of a spillover of external risks into the Canadian financial system. The specific vulnerabilities covered by the buffer continue to include:
- Canadian consumer indebtedness
- Asset imbalances in the Canadian market
- Canadian institutional indebtedness
Against a backdrop of accommodative low interest rates and stable economic conditions, it is prudent to build additional resilience against potential shocks to the financial system. An effective capital regime ensures that banks are holding adequate capital to protect against risks to the financial system, while encouraging them to use their buffers during times of stress to avoid asset-sales or drastic reductions in lending. This announcement is consistent with recent statements from FSB, which caution that “given rising global vulnerabilities, authorities should continue to assess whether existing buffers are adequate to support resilience, taking into account their domestic conditions and cyclical position.”
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. D-SIBs must publicly disclose the level of the Domestic Stability Buffer and include a brief narrative on the buffer. Disclosures are expected quarterly and when OSFI publicly announces decisions to change the buffer level. Breaches of the buffer by an individual bank will require public disclosure pursuant to International Financial Reporting Standards (IFRS).
Keywords: Americas, Canada, Banking, Domestic Stability Buffer, D-SIBs, Systemic Risk, Capital Adequacy Requirements, Financial Stability, Basel III, OSFI
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