Canada keeps bank capital requirements steady as economy weakens

Cole Burston/Bloomberg

Canada's banking regulator chose not to boost capital requirements on the country's largest lenders, signaling that officials believe banks' balance sheets are strong enough to withstand economic turbulence.   

The Office of the Superintendent of Financial Institutions left the domestic stability buffer at 3.5%. It had increased it in June and last December. 

The buffer is like a rainy-day fund designed to protect the system by ensuring that banks can absorb losses in a weak economy or shock to the financial system. The regulator has been raising it in stages since 2021, after lowering it in the early days of the Covid-19 pandemic to free up capital for lending. 

Two key risks for Canadian banks are consumers' high level of debt and weakness in the commercial real estate industry, Peter Routledge, the banking superintendent, said during a news conference. "But we haven't seen very significant losses in either of those sectors," he said, and the risks haven't worsened in the six months since OSFI last raised the buffer.

The decision means the six largest Canadian banks will enter 2024 with the requirement to hold Common Equity Tier 1 capital of at least 11.5% of risk-weighted assets. All six are comfortably above that level, with Canadian Imperial Bank of Commerce and Bank of Montreal closest to the minimum.

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Banks have been setting aside significantly larger provisions for soured loans this year compared with 2022, an adjustment they're making due to higher interest rates, greater financial stress among households and a poor outlook for the Canadian economy.

Elevated mortgage payments are part of what's straining the Canadian consumer. Unlike in the United States, where homeowners can secure rates that last 30 years, Canadian borrowers generally aren't able to lock in their borrowing costs for longer than five years.  

People who don't own their homes are also feeling the squeeze. In October, the Bank of Canada said it's observing signals of financial stress among those without mortgages, with more of them falling at least 60 days behind on loan payments. The delinquency rate on car loans is now higher than before the pandemic, the central bank said. 

The Canadian economy contracted in the third quarter, shrinking at a 1.1% annualized rate, according to estimates from the national statistics agency. The Bank of Canada's official forecast doesn't include a recession next year, but it does see very slow growth and a muted expansion in household spending.