Regulator delays new risk calculation rules amid lending concerns
Canada's banking regulator has postponed a key rule change impacting how banks calculate lending risks.
The Office of the Superintendent of Financial Institutions (OSFI) has announced a one-year delay in implementing new regulations on "capital floor levels" for banks.
These rules, part of the international Basel III accords, would require Canadian banks to use a standardized model to calculate more risks in their loan books, rather than relying on internal methods.
Peter Routledge, superintendent of financial institutions, explained the decision during a recent parliamentary committee hearing: "With respect to the final leg of the changes we're making, which is known as the 'standardized floor' — which is very complex, but is basically a check on the models banks use to allocate capital — we are well ahead of our peers."
This delay allows OSFI to consider the pace of implementation in other countries, particularly the United States, where similar proposed rules have faced strong opposition from lenders. It also gives Canadian banks more time to adjust their books.
The postponement comes amid warnings about the rule change’s potential economic impacts. Bank of Nova Scotia chief economist Jean-Francois Perrault cautioned that the original implementation plan could reduce lending to households and firms by about 9% of nominal GDP "at a time of elevated financing needs."
Read more: Basel III may cause more harm than good to Canada's mortgage market
National Bank of Canada analysts, led by Gabriel Dechaine, estimated that applying the full output floor to Canadian banks' recent quarterly balance sheets would add approximately C$80 billion ($59 billion) in risk-weighted assets to the sector. This could force banks to either increase their common equity tier 1 capital or reduce lending to maintain regulatory capital ratios.
Some banks have already been preparing for these changes. Bank of Montreal, for instance, has employed synthetic risk transfers and exited indirect auto lending in Canada and the US, while Scotiabank has deliberately curbed its mortgage book.
The Canadian Bankers Association acknowledged OSFI's decision in a statement: "The CBA and its members acknowledge OSFI's pause to Basel III Output Floor phase-in to review other jurisdictions' implementation plans. We will look forward to further information from OSFI on their review."
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
