December 4, 2024 – The C.D. Howe Institute’s Domestic Stability Buffer Council (DSBC) recommends that the Office of the Superintendent of Financial Institutions (OSFI) maintain the Domestic Stability Buffer (DSB) for the domestic systemically important banks at 3.5 percent of total risk-weighted assets at its next setting this month. At the same time, the Council urges banks to be ready for future economic shocks.
The domestic stability buffer is capital Canada’s major banks must set aside to cover potential losses during periods of financial stress. The buffer applies to the country’s six largest banks: RBC, TD, Bank of Montreal, Scotiabank, CIBC, and National Bank.
Affiliated with the Institute’s Centre on Financial and Monetary Policy, 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 Canada’s financial system. The Council members attending the meeting were Cathy Cranston, Jamey Hubbs, Peter Levitt, Mark Zelmer, and Chair Jeremy Kronick.
At the DSBC’s November 26th meeting, Council members weighed whether to keep the buffer as is, given relatively weak Canadian economic data, or to increase it, given the uncertainties caused by US President-elect Donald Trump’s threat to raise tariffs on Canadian goods.
The key arguments in favour of increasing the DSB were:
- Risks stemming from our largest trade partner’s tariff threats are substantial and uncertain;
- Retaliation from other countries, most notably China, could have a significant effect on the global economy, and Canada will feel the ripples; and
- Current economic data might be obscuring major tail risks – such as a domino effect in the economy if particularly indebted households begin to default on their loans.
Meanwhile, the key points in favour of leaving the buffer at 3.5 percent included:
- The buffer is already near its 4 percent maximum limit;
- The economy is at a weak starting point, and tightening policy runs the risk of unnecessarily slowing credit; and
- Canada has weathered trade fights in the past and came out the other side without a recession.
The Council ultimately concluded the arguments for leaving the buffer unchanged outweighed those favouring an increase. But even if the buffer is left unchanged, all Council members agreed that the major banks should maintain their current strong capital positions to ensure that they are ready to help the country cope with the economic turbulence that may emerge from the US in the coming months.
For more information contact: Jeremy Kronick, Chair of the Domestic Stability Buffer Council and Vice-President, Economic Analysis and Strategy, C.D. Howe Institute; and Daniel Kitts, Communications Officer, C.D. Howe Institute, 416-220-8470, dkitts@cdhowe.org
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