OSFI’s buffer call a credit negative: Moody’s

Last week’s decision keep the Big Six banks’ capital buffers unchanged is a negative from a credit investor perspective, says Moody’s Investors Service.

In a new report, the rating agency gave a thumbs down to the Office of the Superintendent of Financial Institutions’ (OSFI) decision to maintain the domestic stability buffer (DSB) at 3.5% — keeping the common equity tier 1 capital requirements for the Big Six at 11.5%.

The federal financial regulator’s decision came as it judged that the big banks already have adequate capital to absorb potential losses, and that the banks have been prudent with their capital management.  

Moody’s noted that the capital positions of the Big Six banks are well above their regulatory minimums, which it said provides “adequate allowances to cover chargeoffs over the next 12-18 months.” However, the rating agency also said it sees OSFI’s decision “as credit negative, particularly given a weakening macroeconomic environment.” 

“We view higher capital levels as creditor-friendly, providing the banks with an additional cushion to absorb losses in a stressed environment,” it said.

The regulator’s ruling came in the wake of the latest decision from the Bank of Canada to keep benchmark interest rates unchanged for their third consecutive meeting, Moody’s noted. 

“Recent data suggests that the economy is no longer in ‘excess demand’ and the BoC’s hiking campaign, which began in March 2022, is dampening spending and price pressures. However, the BoC remains concerned about the risks to the outlook for inflation and remains prepared to raise the policy rate further if needed,” it said. 

“While a higher interest rate environment is positive for banks as net interest margins have expanded, we expect loan growth to continue to moderate given a weakening macroeconomic environment. In addition, credit quality metrics are deteriorating towards pre-pandemic levels as borrowers adjust to higher borrowing costs,” Moody’s said.

While OSFI indicated that it could increase the buffer requirement to 4.0% if vulnerabilities rise, it could also cut the requirement if the banks’ credit risks turn into actual losses, the rating agency noted.

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.