New Capital Requirements: The Rate Impact

RiskIt’s sort of counterintuitive that making banks safer often costs you more as a borrower, but that’s what may happen in this case.

Canada’s banking regulator (OSFI) has raised the minimum capital that banks must maintain…again. And there’s a good chance banks could take it out on mortgage borrowers, eventually.

Here’s What Happened

Back in June, OSFI created the “Domestic Stability Buffer” (DSB). The DSB essentially requires the Big 6 banks (who fund most of the mortgages in Canada) to keep more capital on hand in case there’s some kind of industry-wide crisis. That capital is above and beyond the normal capital banks must set aside.

This summer, OSFI set the initial DSB at 1.50% of a bank’s total risk-weighted assets.

Now, just six months later, the regulator has raised it to 1.75%.

OSFI explained:

This reflects OSFI’s assessment that, on balance, the identified systemic vulnerabilities remain elevated while economic conditions continue to be accommodative. Specific vulnerabilities covered by the buffer continue to include: (i) Canadian consumer indebtedness; (ii) asset imbalances in the Canadian market; and (iii) Canadian institutional indebtedness.

OSFI added that it doesn’t have a direct impact on bank’s mortgage businesses. That may be because banks already meet the new DSB requirement.

But the message OSFI is sending the market is that systemic risks are worrisome and that additional capital hikes may be coming. That’ll likely be baked into banks’ funding costs at some point. And usually, when funding costs edge higher, mortgage rates edge higher—that is, at banks and the lenders they fund.

The DSB may eventually make the lowest mortgage rates slightly more costly than they would have been otherwise. But we’re only talking low single-digit-basis-points here, certainly nothing that’s going to change people’s borrowing plans.

Tags: banks

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