Dividend, share buyback ban temporary but 'no firm date' for decision: New head of OSFI
The new head of Canada’s banking watchdog is preaching patience when it comes to loosening restrictions on share buybacks and dividend increases.
In an interview Tuesday, Superintendent of Financial Institutions Peter Routledge said the regulator plans to wait before easing those restrictions, which were instituted at the onset of the pandemic, until it is certain the major risks to financial stability are firmly in the rearview mirror.
“[The Office of the Superintendent of Financial Institutions] has long stated, and I repeat, that we’ll continue to err on the side of being a little late in lifting the restrictions as opposed to a little early,” he said “We judge the level of financial uncertainty as diminishing, but not to a level where returning discretion for capital distribution increases to boards of directors is prudent as of yet. So we’ll just going to monitor that uncertainty and act accordingly.”
“Please, I’d ask folks, be patient. OSFI does have track record of having reasonably good judgment in that regard.”
OSFI under Routledge’s predecessor Jeremy Rudin was swift to act as the pandemic began to sink claws into its the domestic economy. It barred share buybacks and dividend increases in early March of last year, and lowered the Domestic Stability Buffer – a key financial cushion for the large lenders – to one per cent in order to encourage lending activity and avert a scenario where activity ground to a halt.
The banking regulator has since announced plans to raise the DSB threshold to 2.5 per cent of risk-weighted assets, a quarter of a percentage point higher than it was before the pandemic hit. That change takes effect Oct. 31, in line with OSFI’s initial pledge not to raise the buffer until this fall.
While OSFI was quick to implement these financial guardrails in the heady, uncertain days of the pandemic, Canada’s big banks have fared relatively well during the COVID crisis. Loan losses failed to reach levels initially feared and the banks’ balance sheets have swelled.
The Common Equity Tier 1 (CET1) ratio at the Big Five averaged 12.9 per cent at the end of the fiscal second quarter, well above both the nine per cent level currently mandated and the 10.5 per cent level that will take effect when the DSB is raised.
Even though those capital levels have proven resilient, Routledge said that there are still risks in the financial system that require the regulator to be cautious and prudent in easing back on the reins.
“Uncertainty is diminishing, and we ask ourselves every day ‘is it enough, is it enough?’ And you’ll just have to bear with us. There’s no threshold or deadline date we’re aiming for,” he said.
“As we proceed into the reopening, as we head into higher and higher vaccination levels … consistent with stable financial systems globally and in Canada, we think the uncertainty will recede and we’ll constantly be asking the question. But I’m loathe to give a firm deadline or a firm date or even a single firm criteria because it’s not that simple a question.”
While Canada has not yet eased back on its restrictions for financial institutions, south of the border American regulators have given Wall Street behemoths more agency in returning cash to shareholders. That prompted a spate of dividend hikes and buyback announcements Monday, most notably Morgan Stanley’s announcement it plans to repurchase US$12 billion in shares and double its dividend.
In spite of that action in the U.S., Routledge said he didn’t feel any pressure to act rashly and follow the Americans’ lead.
“We’re not blind and we [pay attention], but the criteria that will drive our decision will be the health of the Canadian financial system and the sustainability of the recovery and the continued lessening of uncertainty,” he said.
Before taking the top job at OFSI, Routledge had a long career in the financial services industry, most recently as head of the consumer banking backstop Canada Deposit Insurance Corporation (CDIC). Before that, he was a financial services analyst at National Bank Financial.
Routledge said his time as banking analyst helped inform his cautious approach to unwinding pandemic-era restrictions.
“We said consistently that we view these restrictions as credible, necessary and fit for purpose as long as uncertainty remains elevated,” he said. “As a former analyst, I can tell you one can’t judge market and financial uncertainty with perfect precision. I have a few scars that bear that out.”