Canada’s top banking regulator held the domestic stability buffer (DSB) at 3.5 per cent on Thursday after a review of the “rainy day” funds that the country’s largest banks must keep aside to absorb unexpected financial shocks.

The

Office of the Superintendent of Financial Institutions (OSFI)

said “major vulnerabilities” in the banking system remain elevated, but are stable.

“Today, Canada’s six largest banks hold capital levels well above supervisory expectations,” Peter Routledge, the superintendent of financial institutions, said in a statement. “This enables them to provide core banking services to the Canadian economy throughout the business cycle.”

OSFI requires the

Big Six lenders

to maintain a capital buffer so they can continue lending to households and businesses during periods of financial stress. The DSB is measured as a percentage of the banks’ risk-weighted assets, such as mortgages or credit card loans.

In recent months, Routledge has said the Big Six can help fund Ottawa’s objective to change Canada’s economic model by relying less on the United States and speeding up the building of mines and energy-related projects since they have built up substantial capital cushions.

On Nov. 20, OSFI proposed new rules that could allow banks to free up more capital for lending to the real estate market and small and medium-sized businesses. Those rules are now in a 90-day public consultation period.

A week later Routledge said he was open to further “experiments” aimed at strengthening the economy.

“We’re not done,” he said then. “This is an annual — maybe even ‘annual’ is too long a periodicity — this is just a regular discipline. What experiments can we make to help the financial system finance this shift in the economy?”

But a key reason for holding the DSB at current levels is that the economy and the banks are performing better than expected.

Canada’s big banks also have a higher-than-required cushion, which gives them “ample capacity to continue to grow and profit from their growth,” Routledge said at a press conference on Thursday, referring to the closely watched common equity Tier 1 (CET1) capital requirements, which compare the bank’s capital to its assets. The DSB, introduced in 2018, is a component of the CET1 ratio.

Canadian banks must keep their CET1 ratio, including the DSB, above 11.5 per cent. The Big Six boast an average CET1 ratio of about 13.6 per cent, which Routledge said gives them a cushion of more than $60 billion.

“The economy is doing better than we thought. The banks continue to deliver very good earnings,” Routledge said. “(The banks) continue to return capital to shareholders at a healthy rate … so we’re in an advantageous position, and that factored into our decision to hold the DSB.”

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Routledge said that if conditions aren’t as “advantageous” in the near future, OSFI is prepared to lower the DSB to help “the system absorb the costs and just continue to operate.”

OSFI said Canadian household debt, relative to income, remains high, but relatively stable and below historical peaks. Canadian corporate debt growth has moderated, but credit quality is vulnerable to trade-related headwinds, and global uncertainty, including geopolitical risks, continues to shape the overall risk environment.

In 2022, OSFI expanded the upper limit of the DSB to four per cent, giving it leeway to increase capital requirements if needed.

• Email: nkarim@postmedia.com