Canada’s banking regulator is considering lowering capital requirements for loans for certain corporate and real estate properties in a bid to build lending capacity as the country aims to boost business investment and stimulate its economy.
The Office of the Superintendent of Financial Institutions is adjusting the capital requirements for credit risk to provide banks with more flexibility to lend money and invest, the regulator said Thursday. OSFI Superintendent Peter Routledge has been vocal about adjusting rules that could encourage business lending as a way to boost economic growth.
The proposal is intended to reduce “unnecessary burden without compromising the safety and soundness of financial institutions,” the regulator said Thursday as part of its quarterly update.
Among the revisions, OSFI is proposing lowering risk weightings – the different levels of risk assigned to certain types of bank loans – for low-rise residential real estate projects and loans for small and medium-sized businesses.
By lowering the risk weightings, banks will have to hold less capital for these loans, which could make it easier for related businesses to borrow money for these types of projects.
In September, Mr. Routledge said that OSFI is consulting banks and life insurers “to help them help the country” by changing the way it treats risk in certain business loans.
OSFI announced lower capital requirements in July for life insurers investing in Canadian infrastructure through debt or equity, which could increase funding for these projects.
These signals led up to a tone shift toward Canada’s financial sector in the Ottawa’s federal budget.
The government touted measures to increase business investment and boost competition in financial services, including raising the public holding requirement threshold to allow smaller banks to grow more and committing to launching an open banking regime to provide consumers and businesses with greater authority over sharing their financial data.
While OSFI is lowering capital requirements for certain types of loans, it has so far maintained a high domestic stability buffer – capital banks must maintain to endure the blow of an economic downturn. The DSB is set at 3.5 per cent of a bank’s risk-weighted assets, requiring banks to hold onto billions in excess cash.
Some analysts and banking groups have called on OSFI to lower the buffer to allow banks to use that excess capital and to be more competitive compared with global peers with lower requirements.
“A reduced upper bound on the DSB would help level the playing field,” Bank of Montreal analyst Sohrab Movahedi said in a note to clients.
This should also prompt Canada’s largest banks to “lower their management targets, which would free capital for credit expansion (and support the structural bias towards domestic capital formation embedded in the recently announced federal budget in Canada).”