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Canadian regulator raises banks' domestic stability buffer to 3%

FILE PHOTO: A combination photo shows Canadian investment banks RBC CIBC BMO TD and Scotiabank in Toronto

OTTAWA (Reuters) - Canada's financial regulator said on Thursday it was raising the amount of capital the country's biggest lenders must hold as a stability buffer by 50 basis points to 3% of risk-weighted assets in response to rising economic uncertainty.

The Office of the Superintendent of Financial Institutions (OSFI) said persistent inflation and rising interest rates along with political tensions had exacerbated vulnerabilities.

The new 3% buffer level, which take effect from Feb 1, "reflects OSFI's observation that high levels of systemic vulnerabilities have persisted and, in some cases, increased in recent quarters," OSFI's Chief Risk and Strategy Officer Angie Radiskovic told reporters in a briefing.

OSFI also expanded the range in which it can set the buffer to between 0% and 4%, saying this would give it more flexibility to respond to economic risks.

Radiskovic said Canadian household indebtedness was rising and that highly indebted institutions were expected to be more vulnerable to economic shocks in a rising rate environment.

The Bank of Canada has raised interest rates at a record pace this year to fight inflation that is far above its target. On Wednesday, the bank increased its benchmark overnight interest rate by half a percentage point to 4.25%, a level last seen nearly 15 years ago.

Radiskovic said political uncertainty has increased the chance of a global slowdown that spills over into Canada, though near-term risks were stable and major Canadian lenders had performed well relative to their global peers.

(Reporting by Ismail Shakil in Ottawa; editing by John Stonestreet)