Canada

Canadian Regulators Ask Banks To Put Aside 30% More Rainy Day Capital

Canadian bank regulators are getting ready for you to hit your breaking point. Office of the Superintendent of Financial Institutions (OSFI) announced it is raising the domestic stability buffers. The increase goes into effect this fall, just a few months after being hiked this past spring. An increase in the buffer provides further protection to banks from vulnerabilities. One of those vulnerabilities they’re preparing for is your debt.

Domestic Stability Buffers For Non-Banksters

Domestic stability buffers (DSBs) are a type of capital cushion, that  protects banks. If a financial downturn hits, banks can eat into the buffer, and continue to operate. Instead of the bailouts we saw during the Global Financial Crisis, they can rely on DSBs. The buffer is increased and decreased as vulnerabilities in the system arise. DSBs are in addition to other buffers, like D-SIB surcharges, capital conservation, and CET1 capital. Only banks designated domestically systemically important banks (D-SIBs) are required to have DSBs.

Yeah, that was still too bankstery – so let’s try that again in plain english. The Big Six are too big to fail, meaning they’re necessary for the economy to run. In the event things get sticky, banks liquidate assets to continue to provide loans. If it gets really bad, they seek a bailout from taxpayers. With DSBs, banks can now draw on reserves before that happens. To make a simple comparison, stability buffers are rainy day savings. Asset liquidation is selling your s**t to make rent. A bailout is a payday loan, with nosebleed interest rates shouldered by taxpayers. OSFI is trying to keep these six from needing a payday loan.

The Mandatory Buffer Has Increase Over 30% In Less Than A Year

The ratio of DSBs have made a huge jump in 2019 alone. In April, the ratio increased to 1.75% of total risk-weighted assets, up .25 basis points – or a 16.66% increase. In October increases another .25 basis points to 2.00%, an increase of 14.28% from the April increase. The Big Six have seen the buffer increase a whopping 33.33% in less than a year. That kind of increase in such a short period does give an air of urgency.

What’s The Rush?

The rush to increase is due to a few key vulnerabilities – household debt, and residential real estate being two cited. The debt-to-income ratio of households is elevated, and doesn’t seem to be budging. A little more ambiguous, OSFI said residential real estate market “uncertainties” remain. That’s most likely code for Canadian real estate prices are unsustainable. Even large suburban markets have increased at similar rates to Toronto and Vancouver. All previous measures rolled out to deflate high debt levels are failing to make a material impact.

Household Debt To Income Ratio

The ratio of household debt to disposable income, for both Canada and the United States since the Great Recession.

Source: Statistics Canada, Better Dwelling.

The key take-away isn’t risks for banks are materializing. OSFI’s job is to protect banks, and ensure day to day operations aren’t impacted by a financial downturn. They seem to be pretty good at it. Instead, the real take-away is regulators are seeing the economic outlook becoming worse. Not just warning either, they’re all-hands on deck preparing for a downturn. I’m sure banks totally trust Canadian households will be able to pay their debt obligations. They’re just increasingly preparing for the day they can’t.

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30 Comments

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  • Trader Jim 2 months ago

    Classic. This is why they say trade what you see, not what you know. They’re not increasing the amount of capital they’re sitting on because they think the debt is sustainable.

  • zz 2 months ago

    I remember the first house I bought was in 2010.. people were saying the housing price was too high and I should wait. I didn’t really pay attention to them cause I just graduated and needed a place to live in downtown. since then, I bought 3 more homes. they are all fully covered by rent (net positive evening including principal payment). I think it’s funny how we have this sustainable housing collapse for over a decade. Even if “bubble” burst, I will still be doing ok.

    what I want to say is that don’t just listen to one side. This website is good in a sense it gives some information about the market while treb backed website gives a different version. you should analyze the data carefully with impartiality and then you can make an informed investment decision.

    cheers

    • What Are You Doing Up There? 2 months ago

      Who are these people saying house prices were too high in 2010? Inflation adjusted, they were the same price in large Canadian cities as they were in 1989.

      Now today, house prices are too high. The over extension of credit to accommodate home prices from 2015 to 2018 shaved 30% off the value of the loonie. Home prices can go to infinity in domestic prices, but enjoy your $10 cauliflowers.

      • Canuck550 2 months ago

        Furthermore
        what will occur as our loonie strengthens on global markets, as other currencies weaken due to lower interest rates…..foreign investment leaves as they are getting hit with fx and real estate price declines simultaneously, anticipate many homes to hit the market.
        And reductions in RE escalate, Vancouver always leads the way up and the way down with foreign investment on RE…
        Have we noticed whats occurring on the left coast?
        My two pennies

      • brent 2 months ago

        “Inflation adjusted, they were the same price in large Canadian cities as they were in 1989.”

        but you do realize that 1989 was the peak of the last bubble, and since long-term prices appreciate at or near inflation, it is reasonable to interpret 2010 were elevated prices.

        The big story is how Central Banks have done unprecedented quantitative easing and long-term emergency rates to create asset price inflation rather than allowing the market to re-set and find true discovery. The justification of “too big to fail” won the day, but the bailouts and QE have created many problems for regular people who don’t have big stock portfolios or real estate.

      • Paul 2 months ago

        Zz is just the same troll over and over again. Check the missing prepositions. Not sure why they spend so much time trying to convince with anecdotes. Show me numbers.

        • zz 2 months ago

          it’s my personal experience. how is that anecdote? furthermore, I am not trying to convince other people to buy cause I will certainly not stop buying.
          I am simply stating that there are two sides of every story.
          if you only read from better dwelling, you will think the world is about to end… in reality, this website has been calling for doomsday for several years now..
          there is no doubt that we have cycles in economic activity. it’s easy to say doomsday is coming, but can you pin point when?

          • Nick Couper 2 months ago

            I’m God’s grace to genius.

            But…

            It’s my personal experience. how is that anecdote? 

            Trollololol.

          • GG 2 months ago

            Yes, Sept 16, 2019 at 6:31 pm eastern time.
            If you think this is a doomsday site, and don’t believe it will happen, why spend all your time here.

      • zz 2 months ago

        https://www.policyalternatives.ca/publications/reports/canadas-housing-bubble
        if you go to google and search 201X Toronto housing bubble all the way up to 2019, you’ll see lots of articles and discussions.
        I honestly don’t pay attention to people who claim they can see the future. I put 70% of my saving towards “real estate” fund and 30% in stocks. when I save enough for a down payment, I make a purchase, so far I’ve bought 4… I’ll continue to do so for the next 20 years.
        I do make adjustments from time to time (haven’t bought a house since 2017~), but I will likely enter the market again this year.
        all I am saying is to listen to gut feeling. if you believe the market will crash, then keep on renting.
        listen to people who are doing well and avoid people who are “you know what”

    • Foxxy 2 months ago

      Must be nice to be born into money.

    • Neo 2 months ago

      There weren’t any parabolic moves in housing in 2010. Prices were just steadily increasing in an orderly fashion. 2016 and 2017 was a different story. Debt and credit weren’t under stress like they are now either.

      • Ethan Wu 2 months ago

        He bought at the end of the financial crisis, and is mistaking leverage for skill.

  • TKO 2 months ago

    Interest rates are falling around the world. 3-4% cut to stave off a recession. Here comes the hyper inflation.

    https://www.cnbc.com/2019/05/28/falling-interest-rates-are-sending-a-warning-signal-to-the-stock-market.html

  • vnm 2 months ago

    Batten down the hatches. If Canadian national RE prices and debt levels as a whole are sending off alarm bells, what does that say about local markets where prices, debt and income levels are 50+% out of whack?

  • Bluetheimpala 2 months ago

    INB4 Canadasucks or any troll for that matter who wants to talk shit about Canada…I’m lubed up to my elbow so if you want to make his a play date, get ready for a ‘blue-nami’…I know it is hard for you to understand that the west and a moron like trump controls the world (poo bear xi knows it,lol) but here’s a little secret: the real front is the Eurodollar squeeze and debt. If it makes you feel better to slag off Canada that is well within your right. It is also my right to go full elephant Liam neeson on you.every.single.day. So pucker up buttercup. Tock.BD4L.

    • Average Man 2 months ago

      It’s definitely not just a Canada problem. Look at Australia, which has mirrored us in a lot of ways for the last 15 years. Look at New Zealand.

  • FOMO 2 months ago

    Debt to GDP ? who cares ? that stat totally ignores interest rates – and last I checked interest rates matter…and they are going down not up (as most people thought in 2018).

    the debt service ratio is what matters — not the level of debt.

    mortgages are granted NOT on a multiple of one’s income

    • AJ 2 months ago

      DSR is the right way to look at it. But what you are completely missing is that we are at the same DSR as we were 10 years ago even though the interest rates are the lowest in a long time because there is way more debt. That’s where the risk lies

  • Mmr 2 months ago

    If I listen to morons of this blog I would never buy house in 2009 and will never saw my pirce jump by 300 percent with record two term lowest mortgage rate. Bottom line just dont listen to this bloggers. Probably writing crap from there basements. Pathetic.

    • Diversity, Boyyy 2 months ago

      At the bottom of the financial crisis, you would have made money? OMG, you investment genius. Sometimes you don’t want to see people with all of their money in their house lose money… but then there’s people like you.

      Enjoy your sad little retirement and reverse mortgage!

    • Paul 2 months ago

      Mmr 2009 was the perfect time to buy a house. Right now is not. It’s not complicated.

    • Average Man 2 months ago

      Wait what? 2009? That was 10 years ago. Buying a house then was a great idea. Unless you’re saying the market’s historical increase over the last decade will continue over the next decade. Then you’re insane.

  • Louis Burberry 2 months ago

    Watch PM Justin Trudeau increase the number of Student visas to 1 million, and enticing those living abroad to park their “hard earned millions” from their countries of per capita GDP of less than $5,000 yearly, while you, a law-abiding Canadian, will have to submit paper work even if you withdraw ten grand of your own savings.

  • SUMSKILLZ 2 months ago

    My public sector friends are hunkering down too. Premier Ford has them spooked. They fear layoffs, forced early retirements or upcoming labour strikes in 2020/21. A few have replied to the question, what are you doing this summer? – “we’re staying home, we have to take care of some things.”

  • Zenity 2 months ago

    If they really want to turn real estate around its simple.

    1. Implement speculator tax on corporations owned Residential real estate.
    2. Discourage “investment” property, people who own multiple residential real estate should have their none primary residence real estate tax increased by 3X. We need to make sure non productive rentiers are squeezed out of the property market. They will be forced to reinvest their money to drive real economic activity.

  • Grim Reaper 2 months ago

    Where are the banks going to get the increased cash buffer from and isn’t it dead money for them if they can’t lend it out?

  • AJ 2 months ago

    What percent of the mortgages at the big 6 are insured? These don’t count as risky assets , correct?

  • george 2 months ago

    Exactly!!!

    this will never happen since Canada would be in trouble without money laundering (search article here in BD).

    Also lot of politicians like former BC Finance Minister who owned 8 properties while he was in charge of the province’s finances are too well vested in RE. Corruption to its finest…

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