Canada’s banking regulator is pushing back implementation of a rule change that could have significant implications for Canadian lenders, following consultation with domestic intuitions and global regulators.
Late last week, the Office of the Superintendent of Financial Institutions (OSFI) announced a one-year delay in implementing a higher global standard for lending risk as it waits for other countries to move forward with the change.
Some fear that the increase to the capital floor level for banks, in accordance with standards set out by the international Basel Committee on Banking Supervision, could result in lower lending volumes in Canada, along with higher fees and fewer options for consumers.
The capital floor level sets a minimum threshold for the amount of capital banks must hold relative to their risk-weighted assets, ensuring financial stability and reducing the risk of insolvency.
The delay comes after concerns were raised that Canada was moving forward with the change too quickly, putting its banks at a disadvantage while those same standards face resistance and delay south of the border.
Mortgage Professionals Canada (MPC) expressed concern that the change would have significant implications on the mortgage industry by limiting how domestic banks calculate loan risk.
“We commend OSFI’s prudent decision to delay the implementation of new capital floor levels for another year, preserving lenders’ flexibility in risk assessment,” said MPC’s President and CEO Lauren van den Berg. “MPC has strongly advocated for OSFI to proceed cautiously with significant changes affecting lenders and implement regulations that prioritize flexibility for the consumer rather than limit it with standardized models.”
Van den Berg says that while the standardization model could simplify things for regulators, it would impose limits on both lenders and consumers.
She explains that the global standard could make it harder for lenders to consider unique circumstances or alternative risk factors when making loan decisions. That, in turn, could make it harder for borrowers to qualify for loan products, increase borrowing costs, and limit their product options.
OSFI remains committed to reform
Though the changes have been pushed back by a year, the Group of Central Bank Governors and Heads of Supervision (GHOS) — which oversees the Basel Committee on Banking Supervision and which the Bank of Canada is a member — unanimously reaffirmed its commitment to implementing the reforms as soon as possible.
“The Basel III 2017 reforms will strengthen banks’ ability to withstand financial shocks and support economic growth while enabling them to compete and take reasonable risks,” said Peter Routledge, the Superintendent of Financial Institutions, in a press release. “Key to these reforms’ success is full, timely, and consistent adoption and implementation across BCBS jurisdictions so that competitive balance prevails throughout the international banking system.”
Routledge added that OSFI will implement the reforms with a focus on competitive balance in banking and the soundness of Canada’s capital regime.
The Basel III reforms include a set of measures developed in the wake of the 2008 financial crisis to protect the global economy from future crises, and were accepted by the international body’s members, including Canada, in 2017.
They are intended to ensure financial institutions adhere to a universal standard for balancing risk with adequate levels of capital and liquidity.
The capital floor imposes a universal approach to capital requirements, rather than allowing individual countries and institutions to set their own standards. With the delay, the 2025 capital floor will remain at the current 67.5% threshold, postponing the increase to 70%, originally scheduled for this year, until the 2026 fiscal year.
This article was written for Canadian Mortgage Trends by:
