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The Canadian banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), on Tuesday raised the Domestic Stability Buffer (DSB) by 50bp to 3.50% of total risk-weighted assets for the six large domestic banks. As a result, the banks would have to maintain a minimum CET1 ratio of 11.50% by November, up from 11% currently. The OSFI said that the additional buffer “gives these institutions more capacity to respond to potential vulnerabilities and ensures more capital is available to continue lending and absorb losses in times of stress.” The regulator further went on to list high household and corporate debt levels, the rising cost of debt, and increased global uncertainty around fiscal and monetary policy as vulnerabilities. Keefe, Bruyette & Woods analyst Mike Rizvanovic said that the move was a negative surprise that will place “added pressure” on Royal Bank of Canada (RBC). Bloomberg notes that RBC’s CET1 ratio is expected to fall to 12% from 13.7% after it completes its C$13.5bn ($10.2bn) acquisition of HSBC’s Canadian unit, expected in early 2024. Rizvanovic added that while Canadian Imperial Bank of Commerce (CIBC) is most at risk, with the lowest CET1 among the six banks at 11.9%, they do not expect any of the banks to raise equity capital unless there is a meaningful deterioration in the economy.
RBC’s 5% 2033s moved 0.6 points higher to 98.19 while Scotiabank’s 4.9% Perps rose 0.3 points to 93.86. Socitabank’s CET1 stood at 12.3% as at Q2 end.
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