Peter Routledge, Superintendent, gives Domestic Stability Buffer announcement

Welcome to our December 2024 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 long served as a meeting place amongst Indigenous peoples, including the Algonquin Anishinaabeg people. I am grateful to be present in this territory. 

The DSB is a capital buffer that enables Canada’s six big banks, in times of financial stress, to absorb losses and continue lending to Canadian households and businesses.

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

As a proactive regulator, we adjust the buffer as the risk environment changes to promote stability and contribute to confidence in the Canadian financial system.

We considered the following factors in making our DSB decision:  

• Systemic vulnerabilities are broadly stable but remain elevated
• Near-term risks to bank capital continue to be low, and
• Banks have maintained an adequate level of capital given current financial conditions

We expect these factors to remain stable over the next 6 months so we have decided to maintain the Domestic Stability Buffer (DSB) at 3.5%.  

The DSB has been at this level since November 1, 2023.

Recent stress tests and scenario analysis are also supportive of no change to the buffer. Therefore, OSFI judges that holding the DSB at its current level provides banks with the capacity to support lending while ensuring sufficient capital is available to absorb losses from future shocks.

This said, we are still closely monitoring several important vulnerabilities.

1. Elevated household indebtedness; while the Canadian household debt-to-income ratio has declined since our last announcement, the debt service ratio is little changed and remains near its historical peak. Looking ahead, we expect further pressure on households as mortgages in 2025 and 2026 will renew at higher interest rates. However, this is less concerning than in June since rates have declined and Canadian homeowners have weathered the current credit cycle well.
2. Housing and commercial real estate valuations; these valuations remain uncertain despite recent declines in interest rates. High valuations that correct could intensify credit risk in real-estate secured lending.
3. Non-financial corporate debt levels; these debt levels have continued to rise relative to GDP while liquid asset ratios have dipped slightly.
4. Geopolitical risk environment; geopolitical tensions and the uncertainty of international policies, though rising, have had little impact thus far on the Canadian financial system.

The good news is that Canada’s six systemically-important banks (D-SIBs) continue to maintain strong capital ratios, which now stand more than 500 bps above the 8% adequately-capitalized minimum.

Continued strength in D-SIB performance despite an uncertain economic outlook suggests that near-term risks to capital levels remain low.

However, D-SIBs must remain vigilant and exercise judgement in capital management given heightened vulnerabilities. The DSB is NOT a substitute for prudent capital management and banks should not rely on it as such.

Having a usable capital buffer such as the DSB — which has a range of 0 to 4% — is an important part of a healthy banking system.

As always, we will continue to monitor the environment closely. We are committed to proactively adjusting the buffer as the risk environment changes.