Peter Routledge, Superintendent at the Office of the Superintendent of Financial Institutions, gives Domestic Stability Buffer announcement

Welcome to our June 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 served, for time immemorial, 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 biggest banks, or those we call domestic systemically important banks, 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. As a proactive regulator, we adjust the buffer as the risk environment changes to keep our banking system healthy.

This June, we have decided to maintain the Domestic Stability Buffer (DSB) at 3.5% of total risk-weighted assets in consideration of the following factors:

• vulnerabilities remain elevated, but have not substantially changed in the last 6 months;
• near-term risks have increased but are still assessed as low overall; and
• banks have maintained an adequate level of capital given the current financial conditions.

The DSB has been at that level since November 1, 2023. Canada’s system remains resilient despite a fast-paced risk environment and global uncertainty.

This said, we are still closely monitoring potential vulnerabilities:

• Canadian household indebtedness sits near its historical peak, and debt serviceability remains a concern. Over half of mortgages are set to renew or refinance at sharply higher interest rates. This might lead to more borrowers not being able to make their payments on other loans and debts.
• Canadian asset imbalances -which are sharp increases in the price of assets such as houses that can make the economy vulnerable should those values or prices drop – are still high but remain stable since our December rate announcement. Notably, housing sales are trending well below the ten-year average. Higher interest rates, inflation, and lower demand have put commercial real estate markets under pressure.
• And finally, geopolitical uncertainty remains elevated which has the potential to impact global markets and supply chains.

Meanwhile, banks have continued to perform solidly despite a challenging operating environment, with loan impairments returning to pre-pandemic levels.

While economic growth has moderated somewhat, financial market conditions have remained relatively strong.

Having a useable capital buffer such as the DSB – which has a range of 0-4 %– is built up in good times and released during challenging times – is an important part of a healthy banking system.

This said, the DSB is only one aspect of healthy capital management.  Banks should remain vigilant and continue to exercise prudence in capital management, as the DSB should not be considered as a substitute for sound risk management practices.

We continue to monitor the environment closely and will make further adjustments to the DSB as conditions warrant.

Thank you for your attention.