OSFI sets Domestic Stability Buffer at 3% and adjusts range
News release - Ottawa -
Today, the Office of the Superintendent of Financial Institutions (OSFI) released the results of its fall 2022 review of the Domestic Stability Buffer (DSB) and announced that the DSB level will be set at 3% as of February 1, 2023. In addition, OSFI has increased the DSB’s range from 0 to 4%, instead of the previous 0 to 2.5%.
Launched in 2018, the DSB applies to Canada’s largest banks, known as Domestic Systemically Important Banks or D-SIBs. The DSB is part of a comprehensive supervisory framework and capital regime that encourages D-SIBs to build capital resilience to vulnerabilities, thereby reinforcing the stability of Canada’s financial system and contributing to public confidence in it.
The new level stems from OSFI’s review of the DSB’s design and range in fall 2022, which was conducted to ensure that DSB continues to work as intended and remains an effective tool to promote systemic stability. It also reflects OSFI’s assessment that systemic vulnerabilities remain elevated – with some, namely Canadian household indebtedness and asset imbalances, edging upwards – as well as the results of recent stress tests. Globally, persistent inflation and rising interest rates, along with geopolitical tensions, have exacerbated vulnerabilities and led to increased economic uncertainty.
The increase to the upper limit of the range allows the DSB to remain responsive to an uncertain environment. This new range also gives D-SIBs more capacity to absorb losses from severe but plausible scenarios while sustaining their lending to Canadian households and businesses.
In addition to the new range, OSFI’s review also determined that design of the DSB remains appropriate and has proven its effectiveness as a flexible supervisory tool used to respond to changes in the risk environment. At the same time, it was recognized that there are benefits of providing additional data to the public on indicators used to support OSFI’s DSB decisions, starting with today’s decision. This additional information will be available on the DSB homepage on OSFI’s website in the coming days.
As always, OSFI will continue to closely monitor developments in Canada’s financial system and the broader economic environment. Should vulnerabilities continue to worsen, or new risks materialize, OSFI will respond to minimize the negative impact on regulated entities as well as systemic stability.
“Our review reaffirmed that, on the whole, the DSB continues to serve as a key tool aimed at ensuring both systemic stability and the resiliency of D-SIBs. By setting the DSB level at 3%, increasing the buffer’s upper limit to 4 percent and providing more insight into the risks and vulnerabilities that inform OSFI’s level-setting decisions, OSFI is enhancing the long-term effectiveness of, and public confidence in, the capital regime.”
- Angie Radiskovic, Assistant Superintendent and Chief Risk and Strategy Officer, OSFI
Quick facts
- The DSB is an important policy tool that helps ensure the stability of Canada’s financial system and requires Canada’s largest domestic systemically important banks (D-SIBs) to build up a capital buffer as vulnerabilities grow.
- This buffer can then be released during challenging times, allowing banks to absorb losses and continue to lend to businesses and households.
- During economic downturns, as bank loan losses rise and bank capital ratios fall, OSFI will lower the DSB by a considerable amount and will be comfortable moving capital expectations towards an 8% adequately capitalized floor.
- OSFI reviews and sets the DSB level every June and December but can make changes at other times as circumstances warrant.