Rule could hamper lending amid mortgage renewal surge, expert warns
As Canada races to implement the Basel III banking regulations, concerns are mounting about potential unintended consequences for the nation's financial landscape.
Turley-Ewart, a regulatory risk management consultant and Canadian banking historian, warned that the timing couldn't be worse for millions of homeowners.
The implementation of Basel III banking regulations in Canada could reduce lending capacity just as 2.2 million homeowners up for mortgage renewal, according to Turley-Ewart.
Basel III, an international regulatory accord devised after the 2007-2008 financial crisis, sets higher capital requirements for banks to cover bad loans and losses from trading. While designed to ensure financial stability, its complex methodology and stringent requirements have been criticized for potentially stifling economic growth and reducing bank lending.
Canada, though largely unaffected by the crisis, has been an enthusiastic adopter of these new regulations.
“Canada’s enthusiasm for Basel III threatens to do more harm than good to the Canadian banking system and those it serves,” Turley-Ewart wrote.
The Office of the Superintendent of Financial Institutions (OSFI), Canada’s banking regulator, is pushing for full implementation by mid-2026.
The US Federal Reserve, on the other hand, has indicated it may not impose Basel III as written, and implementation in the UK and EU could be delayed until 2030 or beyond.
National Bank of Canada financial analyst Gabriel Dechaine has projected that Basel III could undermine individual bank earnings, restrict lending, and reduce competition.
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Bank of Nova Scotia economist Jean-Francois Perrault echoed these concerns, warning that banks may need to shed up to $270 billion in risk-weighted assets by mid-2026, reducing lending to firms and households by about 9% of current nominal GDP.
“Implementation may require banks to shed up to $270 billion in risk-weighted assets to meet the output floor by mid-2026,” Perrault noted. “This would reduce lending to firms and households, including mortgage credit, by about nine percent of current nominal GDP at a time of elevated financial needs.”
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The shedding process is already underway. Dechaine reported that Scotiabank’s domestic mortgage book has declined by 5%, or $15 billion, since the first quarter of 2023, and its corporate loan book has decreased by 13%, or $17 billion, between the second quarter of 2023 and 2024.
Royal Bank of Canada CEO Dave McKay also warned of the dangers of OSFI pushing too hard on Basel III implementation.
“We cannot get out of sync with our two major competitive markets, Europe and America,” McKay said.
Perrault pointed out that “government-mandated requirements to shed assets (or raise capital) run counter to efforts to raise investment and improve access to the housing market for Canadians. This seems to be another instance of policy inconsistency in the Canadian policymaking landscape.”
Turley-Ewart suggested that the Canadian banking system, which proved its resilience during the 2007-2008 financial crisis without Basel III, would benefit from a more measured approach. He recommended that OSFI and the federal government consider delaying full implementation of Basel III until the US, UK, and EU adopt similar measures.
By doing so, Turley-Ewart argued, Canada could avoid undermining its banking sector’s competitiveness and ensure that consumers and businesses are not disproportionately affected by higher banking costs and reduced access to credit.
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