BANKING SYSTEM RESILIENCE

“By raising the RSI rate to 3.5%, we are taking steps to strengthen the resilience of large Canadian banks in the face of vulnerabilities. This adjustment will help Canada maintain the resilience of its financial system,” said Peter Routledge, Superintendent of Financial Institutions, in a statement.

The RSI, which applies to Canada’s six largest banks – the country’s systemically important banks – was introduced in 2018 and its interest rate is set twice a year but can be changed at other times if necessary. The purpose of this capital reserve is to allow the major financial institutions to deal with the consequences of an economic slowdown, particularly household and corporate indebtedness, rising debt costs and global uncertainty. Banks can fall back on this reserve in difficult conditions to absorb losses and continue to lend.

HIGH VULNERABILITY

In the current environment, OSFI believes that the vulnerabilities of the financial system remain high and, in some cases, have worsened. “Interest rates have risen and house prices have started to rise again. Households and businesses remain highly indebted, increasing their vulnerability to economic shocks.”

Nearly 12% of uninsured mortgage borrowers make little or no interest payments given the impact on variable-rate and fixed-rate loans, monitoring records show, the government agency reports in a Summary his decision.

BUT SMALL RISKS IN THE SHORT TERM

This measure reduces the expectations for the core capital ratio from 11% to 11.5%. The BISF believes that short-term risks to the capital adequacy of Canada’s major banks are low and stable, as leverage and liquidity ratios of Common Equity Tier 1 capital are “well above minimum requirements”.

In the event that banks’ losses increase and their capital ratios fall, OSFI could cut the RSI partially or to zero and revise capital expectations to around the 8% floor that ensures adequate capitalization. The federal agency could also intervene with regulators to ensure the stability of the financial system.

According to OSFI, economic uncertainty is expected to increase as the impact of interest rates takes hold, while growth is expected to deteriorate. However, the federal regulator notes that financial markets have calmed down after periods of volatility related to the recent setbacks in the banking sector in the United States and Switzerland.