2 Responses to “April 16, 2020”

1. skeptical says:

   April 17, 2020 at 2:06 pm

   Some interesting FAQs answered by OSFI. For both banks and insurers.

   Will OSFI consider placing restrictions on dividends in the future and what would the trigger be?

   On March 13, OSFI instructed all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being. Institutions can continue to pay regular dividends but may not increase them. To clarify, already approved increases to dividends that occurred before OSFI’s March 13 announcement may proceed, but that no new dividend increases can be made post March 13. OSFI will continue to monitor market conditions and the related impacts on FRFIs’ financial condition. Additional measures will be considered as appropriate and necessary.

   Other countries have been announcing limits on dividends along with releases of their buffers. Is OSFI contemplating providing similar instructions to banks and insurers?

   OSFI continues to remain closely engaged with institutions in regards to their capital management. OSFI continues to monitor economic conditions and impacts to FRFIs and consider additional measures as appropriate.

   https://www.osfi-bsif.gc.ca/Eng/fi-if/dti-id/Pages/DTIFAQ_Cov.aspx

2. peet says:

   April 17, 2020 at 7:39 pm

   I find OSFI’s answers in the Q&A’s a collection of platitudes.

   Let’s look at it from the point of view of a pref shareholder.

   On March 13 2020 OSFI lowered the domestic stability buffer [DSB] from 2.25% to 1%, the idea being to free up over $300b in additional lending capacity. The DSB is a component of the required Common Equity Tier 1 (CET1) capital ratio, ie. a base level of 4.5%, a “capital conservation buffer” of 2.5%, a 1% surcharge for systemically important banks, plus the DSB. The DSB is intended to be counter-cyclical, ie. enable the Banks to use the capital they have built during good times, for when it is needed most. Last December 2019 OSFI had in fact decided to raise the DSB from 2% to 2.25% effective April 30 2020, to guard against the risks it then saw including near-record household and corporate debt levels.

   The March 13 2020 reduction in the DSB is supposed to free up additional lending capacity. It brought the minimum CET1 ratio down from what would have been 10.25%, to 9%.

   This gets close to the capital conservation buffer threshhold of 8%. At that point automatic restrictions on paying dividends kick in.

   As a pref shareholder, make your own guesses but it’s possible the Banks might raise common equity before getting too close to the 8%, or consider reducing the common dividend. But should that really concern pref shareholders?

   I might add that the banks in December 2019 were all at comfortably higher CET1 ratios between 11% to 12.1 %. These will obviously be significantly lower this year.