The head of Canada’s banking watchdog says the economy has been more resilient in the face of higher interest rates and debt service costs than he would have guessed a year ago, but that he remains attuned to the potential for conditions to sour.

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In a speech Sept. 26, Peter Routledge, Superintendent of Financial Institutions, said certain measures the Office of the Superintendent of Financial Institutions (OSFI) has undertaken in the wake of the pandemic have him confident Canada’s financial system can weather the storm should a recession hit the shores.

“We’re not in the business of predicting recessions, but we want to make sure our system is ready to absorb and be resilient for a recession, so we took a number of actions to position the system to have a little bit more resilience, and little bit more insurance to absorb a potential recession,” he said.

“Given everything I’ve seen, where we are today, where the economy is today is better than what I expected a year ago. I’m sleeping through the night, I’m waking up early every morning, thinking about, ‘Do I still believe that, are we still OK?’ We are very, very attuned to the possibility of hard times, but the economy is doing better than we expected given the spike in interest rates and the spike in debt service (costs).”

OSFI has taken a number of steps to bolster financial market stability in recent years, most recently raising the Domestic Stability Buffer (DSB) by 50 basis points in June. The DSB functions as a sort of rainy day fund to require Canada’s systemically important banks — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada — to hold more capital on hand to cover potential losses due to economic hardship.

That, in turn, also raised the Common Equity Tier 1 ratio — a slightly different measure of capital requirements, but meant to serve a similar purpose — to 11.5 per cent (a bar all of the Big Six banks can comfortably clear) when the new regulatory requirements take effect on Nov. 1.

OSFI revisits that calculation twice a year, with the next decision coming in December. Routledge refused to tip his hand as to whether another hike was in the offing, but said he had confidence that the proper guardrails were currently in place, though he left himself wiggle room if the macroeconomic landscape changes.

“I don’t want to signal a decision I don’t have to make until December. I’m going to wait (until) all the information comes in and until that time, I’m not going to even think about what that decision will be,” he said.

“I think over the last 15 years we’ve built — not just in Canada, but globally — regulators have built in very sturdy buffers to absorb volatility.”

“I feel quite confident in the resilience of Canada’s financial system.”

• Email: IVandaelle@postmedia.com

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