Office of the Superintendent of Financial Institutions (OSFI) head Peter Routledge in Ottawa, on Jan. 11.Dave Chan/The Globe and Mail
Canada’s banking regulator says the collapse of Silicon Valley Bank was a wake-up call, signalling trouble ahead amid the surging speed at which risks affect financial institutions around the globe.
At an event at the Economic Club of Canada on Thursday, Office of the Superintendent of Financial Institutions (OSFI) head Peter Routledge said the swift fallout from the failure of three banks, the run on deposits at First Republic Bank, and the rescue of Swiss banking giant Credit Suisse AG is prompting regulators to be prepared to act more quickly and reassess current standards as rising risks threaten the stability of the international financial system.
“The wake-up call is be prepared to act,” Mr. Routledge said. “Fortunately, we’ve got a baseline of capital liquidity regulation in place that does have ample financial buffers to deal with the risk.”
In its annual risk outlook for financial institutions in Canada, released last week, OSFI said that the second-biggest risk to the financial system is liquidity and funding, which measures whether a bank has sufficient assets that can be quickly turned into cash to address sudden balance-sheet changes.
Mr. Routledge said the regulator is considering whether liquidity rules set after the financial crisis in 2008 need to be bolstered, and whether it should make adjustments to prevent a run on deposits as more banking is done digitally at faster speeds.
“Obviously the liquidity coverage ratio or the existence thereof did not prevent a run at First Republic or Silicon Valley,” he told reporters during a media roundtable. “There were those rules in place, but the runs happened.”
Canada’s banking system already has high capital requirements, which the regulator raised in December. OSFI raised the domestic stability buffer (DSB) – a reserve of capital that banks could later release during tougher economic times – and expanded the maximum range of the buffer to 4 per cent from 2.5 per cent, giving the regulator the capacity to raise minimum capital levels even higher.
OSFI takes control of Silicon Valley Bank’s Canadian unit
At the time, the move prompted Bank of Montreal to issue a share sale, raising $3.35-billion to boost its capital level as it worked toward closing its acquisition of California-based Bank of the West. Another increase would require the banks to hold onto billions of dollars in additional capital, which they could otherwise reinvest in their businesses or pay out to shareholders.
With the next DSB review slated for late June, analysts have been watching for signs as to whether OSFI will increase the buffer again in light of recent market turmoil, or lower it amid concerns of an economic downturn.
The additional buffer is “a pretty nice insurance policy,” Mr. Routledge said because it can be adapted to economic conditions. “What we’re thinking about all the time … is whether we want a little more insurance.”
The Office of the Superintendent of Financial Institutions' Peter Routledge sat down with mortgage columnist Rob McLister to explain possible new restrictions on mortgage borrowing in Canada, including OSFI's potential new loan-to-income limit and debt service limit. Mr. Routledge also weighs in on whether Canadian banks can withstand a U.S.-style housing crash.
The Globe and Mail
Mr. Routledge also pointed to the potential for a housing market downturn as the top risk, which would further stretch already heavily indebted borrowers. He stressed the regulator’s review of variable-rate mortgages with fixed payments, which hit borrowers with longer amortization periods as interest rates rose. When a mortgage is renewed, banks are able to reset amortization periods to the initial terms, triggering a sudden jump in payments.
He also defended OSFI’s decision to uphold the mortgage stress test, which mandates that lenders test borrowers’ finances to ensure they are able afford interest rate hikes. Mr. Routledge said that the measure has helped shield the market from loan delinquencies as mortgage rates have spiked.
OSFI warns of longer-term risks as banks extend mortgage terms to help borrowers
“Interest rate risk is a very real issue for households,” Mr. Routledge said. “We put in place this mortgage stress test to ensure that Canadians are building that marginal safety just in case. In the last year, that has told us the good Canadian commonsense approach really worked in this case.”