Canada raises capital buffer for banks to highest level as risks mount

By Nichola Saminather and Abhishek Manikandan
FILE PHOTO: The Royal Bank of Canada logo is seen outside of a branch in Ottawa

By Nichola Saminather and Abhishek Manikandan

(Reuters) - Canada's banking regulator on Tuesday raised the amount of capital lenders must hold to guard against risks including near-record household and corporate debt levels, as Moody's Investor Service highlighted high consumer leverage as a "persistent vulnerability."

The move by the regulator, the Office of the Superintendent of Financial Institutions (OSFI), shines a further spotlight on the challenges facing Canadian banks, which have been hurt by a falloff in investment banking income, rising credit provisions and pressure on margins. In 2019, they posted the slowest earnings growth since the financial crisis.

OSFI said banks must hold 2.25% of total risk-weighted assets from April 30, up from 2% now.

OSFI, which reviews the domestic stability buffer (DSB) requirement twice a year, has increased it by 25 basis points every time since it was introduced at 1.5% in June 2018.

Separately, Moody's said that while Canadian banks' 2020 outlook is stable, "consumers have been able to take on higher levels of debt, thanks to low interest rates."

However, consumers are using 15% of disposable income to repay the debt, matching the 2009 recession peak, Moody's Vice President Jason Mercer said in a statement.

New mortgages and loans allowing homeowners to borrow against equity in their properties are growing, Hala Namshi, an OSFI official, said on a media call.

The DSB increase brings the Common Equity Tier 1 (CET1) capital - the core measure of a bank's capital - banks must hold to at least 10.25% of risk-weighted assets; a base level of 4.5%, a "capital conservation buffer" of 2.5%, and a 1% surcharge for systemically important banks, plus the DSB.

Canada's biggest banks have CET1 ratios above that level: 11.1% at Bank of Nova Scotia, 11.4% at Bank of Montreal, 11.6% at Canadian Imperial Bank of Commerce, 11.7% at National Bank of Canada and 12.1% at Royal Bank of Canada and Toronto Dominion Bank.

RBC's capital management practices are "unchanged as we continue to manage our capital considering multiple factors, including OSFI's latest DSB requirement," a spokeswoman said by email.

National Bank declined to comment. The other banks did not immediately respond to requests for comment.

Moody's said the increase in capital buffer levels over recent years cushions banks against unexpected losses.

The Canadian banks index fell 0.3% in afternoon trade in Toronto to a two-month low.

Last month, TD Bank joined RBC on a global list of systemic banks that must hold extra capital.


(Reporting by Nichola Saminather in Toronto and Abhishek Manikandan in Bengaluru; Editing by Maju Samuel and Steve Orlofsky)