CET1 levels hit 13.6% as Canadian banks brace for higher-rate renewals, OSFI signals readiness to act
Canada’s biggest banks will face renewed mortgage pressures as interest rates rise, but regulators say their capital positions remain strong enough to absorb potential financial stress.
As per a June 27 press release from the Office of the Superintendent of Financial Institutions (OSFI), the domestic stability buffer (DSB) will remain unchanged at 3.5 percent.
The regulator said systemically important banks have built up capital during growth periods and now hold an average Common Equity Tier 1 (CET1) capital ratio of 13.6 percent as of April 30, 2025—up 30 basis points since the previous review.
These banks are expected to maintain a minimum CET1 target of 11.5 percent.
Peter Routledge, superintendent of financial institutions, said the banks entered this period of uncertainty from a “position of strength” after fortifying their capital levels in recent years.
Routledge said, “Conditions are better than our planning assumptions earlier in the year.”
However, he noted that many Canadians will face financial pressure as they renew mortgages over the next 18 months at higher rates than those set in 2020 and 2021.
According to the Financial Post, while household debt levels have declined, they remain historically high and continue to pose systemic risk.
OSFI acknowledged that some key vulnerabilities remain elevated, but also said there were no current indicators of financial system stress stemming from global trade uncertainty.
The DSB serves as a capital buffer, intended to be used during economic downturns and built up during growth cycles.
OSFI stated, “Using capital buffers is a sign of a healthy financial system,” and noted that the regulator is prepared to adjust the DSB “should conditions change.”
Routledge added that OSFI is ready to act “with urgency when necessary.”
The DSB applies to Canada’s six largest banks and is reviewed by OSFI in June and December, though changes can occur outside that cycle if warranted.
The current ceiling for the buffer is four percent.
During periods of heightened stress, such as the COVID-19 pandemic, OSFI reduced the DSB to support continued lending and market liquidity.
As reported by the Financial Post, in response to trade tensions in early 2024, OSFI paused new global banking rules and introduced flexibility similar to its 2020 relief measures.
These included reclassifying deferred mortgages and business loans as performing, easing covered bond limits to improve access to Bank of Canada facilities, and transitional adjustments under the Basel III capital framework.
OSFI said it continues to monitor the Canadian financial system and broader economic landscape, with any future DSB decisions dependent on how risks materialize—ranging from major shocks to smaller disruptions.
