Canadian regulators are asking banks to set aside a little extra cash for a rainy day. Okay, a lot more cash for a downpour. Office of the Superintendent of Financial Institutions (OSFI) completed their bi-annual domestic stability buffer review. The regulator sees systemic risks, those that can cause instability to the financial system, remain elevated. In fact, in some areas – they’re seeing systemic risks get even stronger. Consequently, they’re asking banks to set aside more cash, as debt problems worsen.
Domestic Stability Buffers
A domestic stability buffer is capital set aside, to protect against vulnerability. All banks have to put aside assets for rainy days, but domestically systemically important banks (D-SIBs) need more. The D-SIBs are the banks vital to the operation of the country, known as the Big Six in Canada. Since they’re vital to the operation of the country, we don’t want them scrambling for cash in an emergency. Instead, regulators make them put aside extra cash to create domestic stability buffers. The amount varies from 0% to 2.5%, depending on how much risk regulators see when they set the amount. The buffer is reviewed twice a year in Canada – in June and December.
Increases to the domestic stability buffer mean regulators see elevated risks. As risks get larger and closer, the higher the buffer is set. This doesn’t mean a risk-related financial shock will happen tomorrow. But it means the odds of one happening are getting stronger. The increase to the buffer is designed to prevent banks from having a fire sale on their assets, during a crisis.
Decreases to the domestic stability buffer happen when vulnerabilities are lowered. That happens when vulnerabilities sort themselves out (this rarely happens), or they materialize. In the latter case, dropping the size of buffers happens to give banks more liquidity. Important, since liquidity usually dries up right after a large financial event.
OSFI Is Raising The Buffer As Vulnerabilities Increase
OSFI notified D-SIBs of elevated risks, and raised the buffer this week. The domestic stability buffer was raised to 2.25%, just 0.25 points from the maximum. Banks have until April 20, 2020 to meet this requirement. This comes after it was hiked to 2% in June, and was at 1.5% this time last year. That’s a 50% increase over the span of a year. Not exactly an “everything is fine” indicator.
Why Tho?
Regulators noted the increases are due to systemic vulnerabilities being elevated. In some cases, they noted certain vulnerabilities have continued to get worse. Canadian consumer indebtedness, asset imbalances, and institutional indebtedness were cited specifically as risks. They also cited global trade tensions, and increased leverage as potential spillover risks.
The good news is that regulators see the vulnerabilities in the economy. In the event of a financial crisis, banks will be prepared to handle short-term turbulence. The bad news is OSFI’s job is to protect banks, not people. They’re preparing banks to ready for your household’s potential financial failure.
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Would have loved to be a fly at that pre-meeting.
I’m guessing they had an “oh, f&&k. B-20 didn’t work” moment.
Hi,
My understanding is that the Big 6 banks all have their internal capital thresholds well above this minimum already. Is this correct?
If this is the case, what is the “news” here?
Internal capital requirements, and DSBs are different.
A year ago banks were required to hold 9.25% of capital in reserve. Now they’re *required* to hold 10.81% more capital in reserve.
Even if they can easily meet the requirement, there’s a liquidity cost issue, since they have to become more restrictive on lending. A hard min vs a voluntary minimum, are the difference between I could buy it if I wanted to, vs I don’t have the money to buy it.
“liquidity cost issue”
Is going to be the big one. People are focused on the “will banks be fine” narrative. Banks are always fine. Their profits, shareholders, and people servicing debt are going to be the issue.
If lender liquidity lowers, do borrowing costs go up or do they provide more liquidity through monetary policy? Either people pay more (lower consumer spending) or the BOC lowers rates (weaker dollar, higher inflation on imports like food and gas).
Take your pick, but either way it’s not a good situation.
The news might be that the sh*tshow is going to epic, unprecedented, bottomless, worse than planned for. Remember your fundamentals – houses are for living in not for ATM’ing.
The reason its going to *be epic, is because, not only have people leveraged – and spent – the maximum value of their real estate but they have done so publicly, on social media, far more pervasively than in 2007. That is a new development and contributing factor. Should a collapse materialize it will mess with the economy first and then with people sense of identity. With real estate values declining and mortgages not renewing because the equity is just not there, people are going to suffer because they loaded up with debt that they thought they could afford.
Similar lessons were learned in the 60’s-70’s when the drug-pusher was vilified for getting people hooked on drugs that would destroy their lives. In 2010+ it was banks taking advantage with gateway drugs like HELOCs.
Could CIBC have been wrong? We weren’t actually richer than we thought?
Three houses on my daily dog walking course have: been put up for sale, sold, and the homeowners moved out, all in less than 30 days. Since beginning of November. This morning, 2 new listings. Who posts homes for sale in mid December?
Its giving me the heebie jeebies.
Been hearing agents advise investor clients they might make more in the spring, but they shouldn’t look a gift horse in the mouth, since the big increase in sales. If it’s the mortgage industry’s B-20 cohort forecast, this doesn’t last until the end of next year.
Vancouver is seeing an increase in housing sales, as sellers are now more willing to lowering their expectations.
These are the homes that were bought since mid 2015 and are under water. Many are second homes bought using heloc loans, and have negative cash flow.
These homes have to sell..therefore sales are increasing, and it looks like a recovery.
“Never have asset valuations been so far beyond underlying incomes to support those valuations as now.”
https://twitter.com/DiMartinoBooth/status/1204350286644559872?s=20
Dollar stimulus is failing to transmit to households, and is being retained entirely by the investor class. Investor class being those with $10m or more in assets, not the guy driving an Uber to subsidize rent on a condo he rents out.
Not to worry. We can continue to make bad decisions and they will never ever crystallize into a disaster. The history of economics has shown that there is a straight line of ever increasing prosperity to be had if you simply build, build, build for the 1% and destroy the financial base of everyone else.
And if there every is a financial reckoning… those that lived modesty.. will pay for the lifestyles of those that continued to lived beyond their means.
And these are “national” concerns. In most parts of Canada real estate prices are only slightly elevated. Ground zero is Toronto, which like Vancouver is 2-3 times over-valued based on fundamentals. When the economy caves, and jobs start disappearing, it’s going to make 1990 look like a picnic. Think 1929 and Japan.
Won’t housing prices rise if an expected rate cut comes in the New Year?
They didn’t rise here in the US, after interest rates were cut from 2006 through 2012.