John Turley-Ewart is a contributing columnist for The Globe and Mail, a regulatory compliance consultant and a Canadian banking historian.
“Why do so many small and mid-sized Canadian companies [SMEs] have to look abroad for financing?” It’s an unremarkable question. Many ask it. Yet in this case who posed it is noteworthy – a senior policy officer in Canada’s Privy Council Office.
The PCO sits at the centre of the federal government and serves the Prime Minister and Cabinet. It has the answers (or should have). Perhaps the PCO official senses a potential clash, pitting the Competition Bureau of Canada, which has been advocating for pro-competitive policies in the financial sector, against Canada’s risk-averse bank supervisor, the Office of the Superintendent of Financial Institutions (OSFI).
An honest answer on competition in SME bank finance can’t avoid OSFI’s role in constraining competition. And the Competition Bureau is promising an honest answer this fall, setting the stage for a debate as old as Canada itself: what kind of banking system does the country need?
Readers who endured Economics 101 will know what happens when regulation curtails supply. Terms such as market distortion, price escalation, deadweight loss, barriers to entry, rent-seeking, enforcement costs and shadow markets will sound familiar.
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Many Canadians operating SMEs know the practical meaning of these terms. Higher interest rates for loans, opportunities denied, reduced efficiencies, and limited options, other than resorting to more expensive non-bank lending (or foreign financing) or putting one’s personal property on the block.
OSFI has discouraged SME bank financing over the years as a risky proposition, drawing lessons from the U.S., U.K., and the E.U. during the 2007-2008 financial crisis.
Is it any wonder that, as a recent Canadian Federation of Independent Business study found, “since early 2024, more businesses have been exiting than entering the market, with the gap widening in 2025, marking one of the worst periods outside the pandemic.”
The tools at OSFI’s disposal that limit the supply of bank loans to SMEs are hidden in a black box to all but specialists in risk management. Mention of risk-based capital adequacy requirements, leverage ratios, risk weights, capital buffers, Basel III, and supervisory scrutiny generally provokes blank stares.
OSFI’s importance is obscured by this specialist language. It explains, for instance, why the Canadian Federation of Independent Business’s submission to the Competition Bureau on SME finance addresses the consequences of OSFI’s regulatory policy, but not its role in restricting competition through the tools it wields daily.
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Exceptions exist, however. Fintechs Canada, a non-profit association helping financial technology companies break down barriers to growth in Canada, was closer to the mark in its submission: “Prudential objectives can and should be balanced against the public interest in competitive financial markets.”
The fintech association echoed the ambitious merchants, farmers and proponents of new banks from more than 150 years ago. They argued for a banking system that could deliver loans to farmers and merchants in abundance, atop of capital for railways and canals, that would lift the country to its economic feet. We have long debated the balance between access to credit and stability.
OSFI’s Superintendent, Peter Routledge, suggests changes to bank supervisory policy aren’t the “secret sauce” to unlocking more business financing. There is a chorus that says otherwise.
The Canadian Bankers Association points out that the tools used by OSFI create barriers to lending because they don’t “reflect actual historical loss experience.” OSFI takes too much to heart that past performance does not reflect future returns.
National Bank of Canada’s CEO, Laurent Ferreira, has also complained that OSFI’s regulation of SME finance is excessive. And last week, the C.D. Howe Institute added its voice to calls for change at OSFI, reinforcing the CBA assertion that the regulator is too risk-averse to the point of capping economic growth.
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The C.D. Howe report noted that OSFI encourages “more conservative assumptions” that impact SME finance. Those assumptions “can push capital requirements above the actual level of risk.”
Last fall, Mr. Routledge acknowledged that “Maybe a bit more commercial exposure would be … good for the country.” He is proposing modest changes that he suggests “could potentially lead to increased lending to smaller businesses and make it cheaper for them to borrow.” Not now, but in November, meaning the effect will not be felt until well into 2027 and 2028.
OSFI has reason to hedge its change strategy. The recent C.D. Howe report also indicates that OSFI’s slow, cumbersome supervisory model may negate its efforts to loosen the screws on SME bank lending. There is no sense of urgency at OSFI, despite the urgency of the moment.
If the Competition Bureau wants to name impediments to SME finance competition in Canada, it need only look down the hall to OSFI.