By Ketki Saxena
Investing.com -- In a move reflecting apprehension about potential economic and financial challenges, Canada's banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), has increased capital requirements for the nation's largest banks. This marks the second time in approximately six months that such measures have been implemented.
The OSFI announced its decision to raise the domestic stability buffer from its current level of 3% to 3.5% of risk-weighted assets. Serving as a safeguard for banks during future difficulties, this buffer was previously augmented by an identical amount in December.
Determinations regarding the stability buffer are based on various factors influencing financial risks, including debt levels and economic projections.
This latest development highlights concerns within Canada about how households will manage rising borrowing costs over time and whether banks' loan losses may increase from their presently low rates.
"Current vulnerabilities, including high household and corporate debt levels, the rising cost of debt, and increased global uncertainty around fiscal and monetary policy, coupled with Canada’s financial sector showing strength throughout the winter and spring has presented the opportunity for OSFI to build more resiliency in the system,"
stated the bank watchdog in a press release. The updated capital requirement is set to take effect on November 1.
As a result of these changes, each of Canada's six major banks must maintain Common Equity Tier 1 capital comprising at least 11.5% of risk-weighted assets. While all six institutions currently exceed this threshold, Canadian Imperial Bank of Commerce is nearest to the minimum requirement.
According to Peter Routledge, the superintendent of financial institutions, Canada's banks are "profitable, sound, generating ample capital," making it an opportune moment for boosting the domestic stability buffer.