November 15, 2023 - The C.D. Howe Institute’s new Domestic Stability Buffer Council (DSBC) – composed of seven senior professionals in the areas of financial and monetary policy, including Jeremy Kronick, the Institute’s Director of the Centre on Financial and Monetary Policy and chair of the group – met earlier this month (November 2) for their inaugural meeting. Voting on the appropriate size of the Domestic Stability Buffer (DSB) at the Office of the Superintendent of Financial Institution's (OSFI’s) upcoming December announcement, the Council recommends that the level remain at 3.5 percent.
The DSB is a publicly announced capital buffer that the big six Canadian Banks must set aside to cover potential losses during periods of financial stress. According to OSFI, the range for the buffer is between 0 and 4 percent. It is currently set at 3.5 percent.
“As a relatively new feature of the financial system (introduced in 2018), public understanding of the DSB can be improved. OSFI raises the level of the buffer in good times when the economy is growing strongly and then will lower the capital buffer in bad times so that banks will have more room from a capital perspective to absorb or provision for losses without restricting activity and lending,” said Mr. Kronick. “Without this buffer, the six major banks would be under greater pressure to preserve regulatory capital and restrict activity and lending, thereby amplifying economic downturns.”
Members highlighted that a recommendation on the DSB required an analysis of data along two dimensions: a change in risks, and the state of the underlying economy, assessing the potential impacts from both on bank balance sheets and operations.
There was a consensus that risks to bank balance sheets have increased since June. However, there was also consensus that economic activity has taken a turn for the worse. Members debated the weight to be given to each, but concluded that, at present, the window has likely closed to raise the DSB buffer further and that doing so could be counterproductive. With 3.5 percent near the DSB’s top end of 4 percent, there remains significant room to release the buffer as appropriate so that banks are less likely to amplify a situation in which conditions have worsened.
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.
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.
The mission of the Centre on Financial and Monetary Policy at the C.D. Howe Institute is to be the foremost hub of influence and direction on critical and emerging issues in both financial services and monetary policy. It aims to improve the design and awareness of public policy in the areas of financial and monetary policy by providing best in class scholarship and insights that Canadians can trust.
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