Worried watchdog orders banks to hold on to more cash

A bank machine dispenses cash in Toronto (Reuters)

Canada’s banking watchdog wants the country’s biggest banks to sock away more money for a rainy day. 

The Office of the Superintendent of Financial Institutions (OSFI) raised the domestic stability buffer — the extra cash banks must have on hand, to help weather the next economic storm.

OSFI says it’s seeing some storm clouds on the horizon, so it’s raising the buffer from 2 per cent of total risk weight assets to 2.5 per cent. Last year it was 1.5 per cent.

The watchdog says key vulnerabilities to Canada’s systemically important banks are elevated and in some cases could increase.

Those risk factors include “Canadian household indebtedness, asset imbalances and institutional indebtedness,” according to an OSFI release.

“In addition, global vulnerabilities related to ongoing trade tensions and rising leverage are growing, which could increase the chance of a spillover of external risks into the Canadian financial system.”

The increase applies to the country’s six biggest banks: RBC (RY.TO), TD (TD.TO), BMO (BMO.TO), Scotiabank (BNS.TO) CIBC (CM.TO), and National Bank (NA.TO).

The regulator says increasing the buffer is good for the economy and for the banks.

“Against a backdrop of accommodative low interest rates and stable economic conditions, it is prudent to build additional resilience against potential shocks to the financial system.

“An effective capital regime ensures that banks are holding adequate capital to protect against risks to the financial system, while also encouraging them to use their buffers during times of stress to avoid asset-sales or drastic reductions in lending.”

The announcement says more about increased risks to the economy than it does about the banks. All six banks already have buffers larger than what OSFI requires. They also all earmarked more money this quarter, to cover possible loan losses down the road.

Today’s announcement had no effect on any of the banks’ stock prices today.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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