Boosting banks’ buffer a prudent move: DBRS

Tuesday’s decision by the Office of the Superintendent of Financial Institutions (OSFI) to boost the capital buffer on Canada’s big banks is a prudent one in the current moment, says DBRS Morningstar.

In a research note, DBRS Morningstar said the move requiring Canada’s domestic systemically-important banks (D-SIBs) to carry 3.5% of total risk-weighted assets, up from 3.0%, will raise the banks’ total tier 1 common equity capital requirement to 11.5%, and the total loss-absorbing capacity (TLAC) requirement to 25.0%.

“DBRS Morningstar views OSFI’s decision to increase the [buffer] as prudent to build additional resiliency in Canada’s financial system during a period of mounting vulnerabilities,” it said, noting that OSFI cited concerns about “high household and corporate debt levels, the rising cost of debt, and the increased global uncertainty around fiscal and monetary policy.”

Raising the capital requirements provides the big banks with “additional capacity to absorb losses while giving the federal banking regulator excess room to lower the [buffer] in a potential downturn to support continued lending resilience,” DBRS said.

As it currently stands, the big banks already meet the new, higher requirement — which takes effect on Nov. 1 — as they appear to be targeting a tier-1 capital level of 12%, it noted.

Moreover, the banks also have the ability to raise more capital, if needed, DBRS said.

“We view the large Canadian banks as being able to take additional actions to boost capital levels if needed to align with the higher regulatory requirements,” it said.

Separately, Fitch Ratings also affirmed its credit ratings on all of the big banks today, following OSFI’s announcement, and it raised the rating outlook for Bank of Montreal from negative to stable, citing its “solid and above-target capital adequacy levels following the successful close of its acquisition of Bank of the West.”

In a report announcing the rating action, Fitch said it expects BMO to produce solid internal capital generation for the remainder of 2023 and into 2024.

“Loan growth is expected be moderate, allowing BMO to maintain capital levels comfortably above regulatory minimums and its own internal capital targets,” it said.

OSFI’s decision to increase the buffer follows the regulator’s move last December to both increase the buffer (also by 50 basis points) and raise the upper limit for the buffer to 4.0% from its previous level of 2.5%.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.