Experts flag elevated risks but see no acute stress, advising OSFI to keep the DSB at 3.5%
Canada’s financial institutions watchdog is being urged to hold a key capital buffer in place as policymakers balance a muted economic outlook against persistent, albeit contained, financial vulnerabilities.
The C.D. Howe Institute’s Domestic Stability Buffer Council (DSBC) is recommending that the Office of the Superintendent of Financial Institutions (OSFI) maintain the Domestic Stability Buffer at 3.5% when it announces its next setting in December.
The buffer applies to the country’s six domestic systemically important banks (“the Big Six Canadian banks”) namely RBC, TD, Bank of Montreal, Scotiabank, CIBC and National Bank.
During its November 12 meeting, the Council assessed how conditions have shifted since OSFI last kept the buffer steady in June. Members found only marginal changes in the macro backdrop including that household debt-to-income and house-price-to-income ratios have eased slightly and debt service burdens have retreated from their rate-hike peaks.
However, countering these positives are data that shows that unemployment has drifted higher despite a recent decrease and global uncertainty indicators remain well above long-run norms.
Capital and liquidity metrics remain strong across the major institutions, and provisions for credit losses declined even as non-performing loans continued to rise, which is an unusual combination. However, financial-sector leverage has edged up and corporate debt remains elevated. Collectively, members said the overall picture largely mirrors conditions earlier this year.
Against that backdrop, the Council agreed that “while the economy has been sluggish this year, there are no signs of severe stress in the financial system. Likewise, while underlying vulnerabilities continue, they have not yet crystallized.”
The group highlighted the importance of Canada’s access to US markets ahead of upcoming CUSMA negotiations, warning that any weakening in that relationship would pose a significant economic threat. They also noted that protectionist sentiment in the US appears likely to remain elevated regardless of political outcomes.
Given these risks, the Council argued for keeping the buffer “powder dry,” preserving OSFI’s ability to respond swiftly if conditions deteriorate. Members emphasized that the regulator should be ready “to quickly release all or part of the buffer if Canadian economic conditions worsen to the point where major banks need more capital headroom to maintain the flow of credit.”
The DSBC will meet again in May 2026 ahead of OSFI’s next scheduled DSB announcement.
