The DSBC provides OSFI, industry participants, and key economic policy voices with an independent assessment of the appropriate size of the buffer in pursuit of OSFI’s mandate of contributing to public confidence in the Canadian financial system. The Council consists of Vivian Abdelmessih, Cathy Cranston, Jamey Hubbs, Peter Levitt, Duncan Munn, Mark Zelmer, and Jeremy Kronick, who is Chair. Council members make recommendations for OSFI’s upcoming DSB announcement.
At their meeting on April 30, Council members stressed upfront the importance of understanding the different scenarios for increasing or decreasing the DSB. The DSB is meant to act as a countercyclical capital buffer for domestically systemically important banks (D-SIBs). As such, it is expanded in good economic times when vulnerabilities are on the rise. It can then be reduced or released when bad economic times hit, giving the banks more room in terms of capital to absorb or provision for losses without restricting lending, which could further exacerbate economic conditions. The DSB can also be reduced in good economic times if vulnerabilities are lessening.
Members argued that many of the risks OSFI highlighted at its previous setting – real estate markets, geopolitical tensions – have only increased since December. However, the economic outlook has worsened, with, among other things, the unemployment rate increasing to 6.1 percent in March, compared with 5.8 percent in December, and real GDP growth slowing in February, and set to remain flat in March. With D-SIBs posting capital ratios in excess of 12.8 percent, there is space to address future risks.
With the DSB near the top end of the range, and the economy potentially entering a slowdown, members argued that there was insufficient justification to increase the DSB. Instead, they highlighted the conditions they would want to see before reducing the buffer. Broadly speaking, the two scenarios are: 1) when banks are, or seem set to, cut back on lending activity; or 2) when there are clear indications that current risks and vulnerabilities are on the wane. At this time, members felt that neither of those conditions were imminent, though a scenario may emerge where the supply of credit begins to contract or lending conditions tighten unduly.
For more information contact: For more information, please contact Jeremy Kronick, Director of the Centre on Financial and Monetary Policy and Associate Vice President, C.D. Howe Institute at jkronick@cdhowe.org, and Gillian Campbell, Communications Officer, C.D. Howe Institute at gcampbell@cdhowe.org.
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