The Office of the Superintendent of Financial Institutions (OSFI) has provided greater transparency to the market surrounding the Domestic Stability Buffer (the DSB) currently held by Domestic Systemically Important Banks (D-SIBs) in a bid to guard against Pillar 2 risks associated with systemic vulnerabilities. OSFI revealed last week that D-SIBs must hold an extra cushion, or the DSB, to bolster their core capital reserves. While this cushion has just been publicly disclosed as a requirement, it has been an existing practice among banks.
The DSB applies only to D-SIBs and is intended to cover a range of systemic vulnerabilities that OSFI believes are not adequately captured in the Pillar 1 capital requirements described in OSFI’s Capital Adequacy Requirements Guideline. This added capital requirement, which is set at 1.5 per cent over and above the minimum required capital reserve, is meant to be held in good times and spent to help stabilize banks in a downturn or a crisis. In practice, this means that the official floor for a DSIB’s common equity tier 1 capital ratio is now 9.5% percent.
This DSB was conceived through the Basel II reforms, which is a set of recommended regulations that was introduced to govern global banks’ conduct during the 2008 financial crisis. OSFI confirmed that the banks have already had to meet this requirement; however, OSFI will now be disclosing the requirement publicly generally in June and December.