Opening remarks by Superintendent Peter Routledge at the December 2023 level-setting announcement for the Domestic Stability Buffer

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Welcome to our December 2023 rate-setting announcement for the Domestic Stability Buffer, or DSB.

I would like to acknowledge that I am speaking to you from Ottawa on land that has served, for time immemorial, as a meeting place amongst Indigenous peoples, including the Algonquin Anishinabeg people. I am grateful to be present in this territory.

The DSB is a capital buffer that enables Canada’s six domestic systemically important banks – or DSIBs – to absorb losses and continue lending to households and businesses in times of economic stress.

OSFI reviews the DSB rate twice per year, in December and June – and at other times if necessary.

After careful consideration – OSFI will maintain the DSB level at 3.5% of total risk-weighted assets, a level announced in June 2023 and in effect since November 1, 2023. Accordingly, OSFI expects all systemically important banks to maintain a Common Equity Tier 1 ratio of at least 11.5% of risk-weighted assets. 

Three factors underlie our decision not to change the DSB.

First, since our DSB announcement last June, systemic vulnerabilities have remained elevated but have not worsened.

Second, we judge the loss absorbency implicit in a 3.5% DSB as adequate insurance against a severe but plausible deterioration in financial conditions.

Third, our decision recognizes the prudent approach to capital management taken by the Boards of Directors of Canada’s systemically important banks, all of which have produced CET1 ratios exceeding 12%.

Since the June 2023 DSB announcement, household debt levels and interest rates have remained elevated. Households with high debt levels are vulnerable to the payment shocks that attend higher mortgage rates upon renewal. At the same time, there are some positive signs including improvements in the household debt-to-income ratio and in the falling rate of inflation. 

Meanwhile, commercial real estate also faces material vulnerabilities revealed by higher interest rates. While office, and construction & development are the riskiest CRE segments, all commercial property types face increased risks. Finally, intensifying geopolitical conflicts have also exacerbated external vulnerabilities, and further escalation could impact global growth and markets.  

Despite these vulnerabilities, OSFI holds the view that Canada’s systemically important banks have reached a level of reserve capital that is sufficient to handle potential risks and uncertainties. 

OSFI has set a minimum capital floor for the systemically important banks at 8% on the Common Equity Tier 1 ratio. If an institution were to fall below this level of capital, OSFI would require automatic capital preservation actions (e.g., dividend cuts). Above this floor, OSFI imposes a capital buffer expectation for the systemically important banks that we call the Domestic Stability Buffer, or DSB.

Having a useable capital buffer such as the DSB – built up in good times and released during challenging times – is an important part of a healthy banking system. 

By design, the DSB is meant to be used when financial conditions worsen. If financial system vulnerabilities materialize into actual losses, OSFI could lower the DSB. If vulnerabilities intensify from today’s levels, OSFI could raise the DSB to a level no higher than the top of the current range of 0% to 4%.

Moreover, we believe that Canadians should look at a lowering of the DSB as an intended part of OSFI’s regulation of Canada’s systemically important banks. If OSFI lowers the DSB, that means that we will judge a fall in capital ratios as expected and consistent with a well-capitalized systemically important bank.

Thank you for your attention.