Canada’s Largest Banks Maintain Capital Requirements amid Financial Uncertainty

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Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, announced that it will not require the country’s largest banks to increase their capital reserves to protect against potential losses during times of financial uncertainty. The regulator stated that the current reserve capital level of the six largest banks is sufficient to absorb any losses that may arise from current vulnerabilities.

Introduced in 2018 to promote systemic stability, the domestic stability buffer is determined biannually based on factors such as household debt, asset imbalances, and other financial trends and risks. The buffer was raised by half a percentage point in June and December, with the upper limit expanded from 2.5% to 4%.

Under the regulatory requirements, which apply to Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank, the banks are expected to maintain a Common Equity Tier 1 ratio of at least 11.5% of risk-weighted assets. As of October, the Big Six banks’ ratios ranged from 12.4% to 14.4%, showing an increase compared to the previous year despite challenges faced by the banks such as rising provisions for credit losses and a slowdown in borrowing due to the central bank’s rate-raising campaign.

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Unemployment Continues to Rise in Canada

Unemployment in Canada has been steadily increasing since April, reaching its highest level since January 2022 last month. This rise in unemployment is indicative of broader cracks appearing in the country’s economy. In the third quarter of the year, gross domestic production contracted slightly, and the property market has once again weakened.

As expected, the Bank of Canada has chosen to maintain its policy interest rate at a historically high level of 5%. However, policymakers have acknowledged the possibility of further tightening of monetary policy in the future if necessary.

The Office of the Superintendent of Financial Institutions (OSFI) conducted an assessment and found that systemic vulnerabilities remain elevated. They also noted that near-term risks to major banks have moderately increased from previously very low levels.

OSFI’s assessment discovered that household debt levels and interest rates have remained elevated since their last decision in June. This is due to increased uncertainty in the housing market. Furthermore, households with high debt levels are still vulnerable to payment shocks caused by higher mortgage rates during loan renewals. However, there are also positive indicators such as improvements in the household debt-to-income ratio and a decrease in the rate of inflation.

Commercial real estate is also facing vulnerabilities due to higher interest rates. In addition, intensified geopolitical conflicts are adding to external vulnerabilities.

The OSFI has committed to closely monitoring financial system developments both within Canada and internationally.

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