Canada cuts banks' capital buffer, suspends mortgage stress test change

By Nichola Saminather

TORONTO (Reuters) - Canada's financial regulator is reducing the amount of capital lenders must hold to guard against risks to the lowest level on record, it said on Friday, as part of a series of measures to help gird against the economic impact of the COVID-19 pandemic.

The Office of the Superintendent of Financial Institutions (OSFI) is also suspending a consultation on a change to a mortgage stress test that could have lowered the benchmark used to determine the minimum qualifying rate for borrowers with downpayments of more than 20%.

The moves come on the heels of the Bank of Canada's second half-point interest rate cut in 10 days, as authorities seek to stave off a potential recession amid the coronavirus outbreak.

OSFI said it will lower the Domestic Stability Buffer (DSB) to 1% of total risk-weighted assets, effective immediately, reversing a December increase to 2.25%, which was set to take effect on April 30.

This is the first reduction to the buffer, which OSFI has increased by 25 basis points every time since it was introduced at 1.5% in June 2018.

It drops the Common Equity Tier 1 (CET1) capital - the core measure of a bank's capital - banks must hold to at least 9% of risk-weighted assets; a base level of 4.5%, a "capital conservation buffer" of 2.5%, and a 1% surcharge for systemically important banks (SIBs).

"This action is being taken in order to support domestic SIBs’ ability to supply credit to the economy during an expected period of disruption related to COVID-19 and market conditions," OSFI said in a statement.

The change will support more than C$300 billion ($217.41 billion) of additional lending capacity by the country's biggest banks, it said.

OSFI also said it would halt a consultation on a change to the mortgage stress test benchmark that would have shifted away from the Bank of Canada's published rate based on banks' advertised rates, to actual market rates, which tend to be lower.

The Canadian Department of Finance, which said a similar change to insured mortgages, with downpayments of less than 20%, would take effect on April 6, has also suspended that plan, OSFI said, adding the central bank's published rate will remain the benchmark.

The changes would have allowed consumers to borrow more, something that the recent rate cuts have now facilitated.

(Reporting by Nichola Saminather in Toronto; Editing by Jonathan Oatis, Matthew Lewis and Tom Brown)