The Office of the Superintendent of Financial Institutions (OSFI), Canada's financial regulator, has raised the capital requirements on the country’s six largest banks.
The stability buffer imposed on Canada’s main lenders has been lifted by 50 basis points to 3.50%.
OSFI said rising borrowing costs, high debt levels, and stress on the financial system required the increased capital buffer, which goes into effect on November 1 of this year.
The regulator said Canada’s banks need to keep more cash on hand to cover potentially bad loans as household and corporate debt levels across the country continue to rise.
There is also growing uncertainty around fiscal and monetary policy worldwide as the prospects of a global economic recession intensify, said OSFI.
With interest rates continuing to rise in Canada, there are concerns about escalating delinquency rates for mortgages and other forms of consumer debt.
The stability buffer in Canada was created in 2018 to help banks build capital reserves and cover loans that ultimately turn bad or fall into default.
The common equity tier 1 ratio for Canada's six largest banks will now increase to 11.5%, up from 11% previously. The ratio compares a bank's capital against its risk-weighted assets to measure its resilience in the event of an economic downturn.
This is the second consecutive time that OSFI has raised the capital buffer on Canada’s banks. In December 2022, the regulator increased the buffer by 50 basis points to 3.0%.
