June 23, 2020 / 12:56 PM / 9 days ago

Canadian regulator keeps big banks' capital buffer at 1%, open to easing further

TORONTO (Reuters) - Canada’s banking regulator on Tuesday kept the capital buffer the country’s six biggest lenders must hold at a record low 1% of risk-weighted assets and said it was prepared to lower it further if needed.

The Office of the Superintendent of Financial Institutions (OSFI) noted elevated financial system vulnerabilities and pressure on highly indebted households and businesses due to the coronavirus outbreak, but said the current Domestic Stability Buffer (DSB) level can support the banking system and overall economy.

OSFI made an out-of-schedule 1.25 percentage point reduction to the buffer in March, freeing up more than C$300 billion ($222 billion) of lending capacity as part of a broader push by authorities to limit the pandemic’s economic impact.

“The timing and size of any further release will depend on the duration and depth of our economic slowdown and also how it may be reflected in banks’ capital ratios and financial results,” OSFI official Jamey Hubbs said on a media call.

The biggest banks posted C$170 billion of total credit growth in March and April, an increase of nearly 6% over the two months, Hubbs said, despite little evidence of change in underwriting standards.

Canada’s six biggest banks increased lending to households and businesses by 10.8% in the three months ended April 30 from a year earlier, and put aside nearly C$11 billion to cover potential loan losses.

While mortgage deferrals, about 16% of their total home loan books, were a consideration, they were not a key determinant in Tuesday’s decision, Hubbs said.

OSFI, which sets the DSB level every June and December, had raised it by 25 basis points every time since it was introduced at 1.5% in June 2018 until December.

Any increases following the March reduction would not take effect for at least 18 months, it said.

Reporting by Nichola Saminather, editing by Nick Zieminski and Steve Orlofsky

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