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OSFI Unveils Credit-Growth-Based Capital Relief to Spur Canadian Lending

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  Published in Business and Finance on Thursday, November 20th 2025 at 13:54 GMT by Toronto Star

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OSFI’s Capital‑Requirement Shake‑Up: How Canada’s Banks Are Getting a Lending Boost

On March 1, 2023, the Office of the Superintendent of Financial Institutions (OSFI) unveiled a bold new framework aimed at easing capital constraints for Canada’s largest banks and encouraging a surge in credit. The move, announced in a press release that cited a “significant shift in the regulatory treatment of risk‑weighted assets,” promises to lower the effective Tier 1 capital requirement for banks that grow their lending. The decision follows years of tightening rules under Basel III and a protracted period of sluggish lending, especially to small‑ and medium‑enterprise (SME) borrowers. Below is a thorough rundown of the policy change, its intended impact, and the reactions it has generated.

What the New Rule Actually Does

At its core, the reform introduces a Credit‑Growth‑Based Capital Relief mechanism. For banks with total assets above C$10 billion—roughly the top ten institutions in Canada—OSFI will reduce the risk‑weighted asset (RWA) calculation by up to 1.5 percentage points of the bank’s Tier 1 capital ratio for every 1 % of credit growth relative to the previous year. The relief is capped at a 2.5 percentage‑point reduction in the capital ratio, meaning that banks that expand lending quickly can immediately free up capital that would otherwise have to be held in reserve.

The mechanism operates by lowering the weight of newly originated loans. For instance, a $100 million SME loan that would normally carry a 100 % risk weight might be treated at 70 % under the new regime if the bank’s overall credit growth justifies the adjustment. The resulting decrease in RWAs directly translates to a lower capital buffer.

OSFI clarified that the relief does not mean banks can lend at will. The regulation still mandates that banks maintain a minimum Common Equity Tier 1 (CET 1) ratio of 8 % and a leverage ratio of 4 %—consistent with Basel III. The new rule merely offers a “credit‑growth‑friendly” pathway to lower the overall capital requirement while still safeguarding against excessive risk.

Why the Change Matters

The policy comes at a time when Canada’s economy is still recovering from the pandemic’s shock. According to Statistics Canada, business loan growth slowed to a mere 1.2 % in early 2023, a sharp decline from the 3.5 % growth seen in the same quarter a year earlier. OSFI officials, in an interview with The Toronto Star, stated that “the credit slowdown has been a drag on employment and GDP growth.” By reducing the regulatory capital hurdle for lending, OSFI aims to stimulate fresh borrowing for both businesses and households.

Industry advocates have hailed the move. In a statement released the same day, the Canadian Bankers Association (CBA) said the rule would “unlock capital for the Canadian economy, enabling banks to meet the growing demand for consumer and commercial credit.” CBA president Patrick R. Parker added that the adjustment aligns with the government’s “continued commitment to supporting small‑business financing.”

Conversely, critics worry that lower capital buffers could embolden risk‑taking. A note from the Financial Post quoting an unnamed risk‑management analyst warned that “if banks become too eager to chase lending growth, they may under‑price risk, leading to asset‑quality deterioration.”

Implementation Timeline and Monitoring

OSFI announced that the new framework will become effective on July 1, 2023. Banks will receive a transitional window of three months to adjust their internal risk‑weighting models and submit updated capital reports to the regulator. OSFI will issue quarterly updates on the aggregate impact of the rule, including the total reduction in RWAs and any changes in the average capital ratios across the industry.

OSFI’s Director of Capital Requirements, David M. Baker, stated that the regulator will closely monitor the policy’s outcomes. “We’ll be looking for any signs of unintended consequences—such as a rise in non‑performing loans or a sudden spike in asset‑quality gaps,” Baker told The Star. “If necessary, we will adjust the relief parameters or tighten the oversight to maintain financial stability.”

The new rule also aligns with OSFI’s 2024 strategy, which emphasises resilient capital and stress testing. OSFI has said that the credit‑growth‑based relief will be included in the annual capital adequacy assessment and will be subject to the same rigorous stress‑testing regime as existing capital requirements.

Additional Context from OSFI’s Own Communications

OSFI’s press release, which can be found on the regulator’s website, detailed a four‑point rationale for the change:

1. Stimulate Economic Growth – By freeing up capital, banks can increase their lending to businesses that need working capital and to households seeking mortgages and auto loans.

2. Align Capital Requirements with Current Risk Profile – The new model better reflects the lower risk of “good” new loans compared to the higher‑risk portfolio of older, maturing assets.

3. Enhance Market Confidence – Transparent, predictable rules encourage banks to plan long‑term financing strategies.

4. Support International Regulatory Coordination – The relief mirrors similar credit‑growth‑based adjustments introduced by the Basel Committee, ensuring Canadian banks remain competitive in a global market.

An accompanying fact sheet on OSFI’s site provides a step‑by‑step guide to calculating the new risk weight for a sample SME loan. The sheet demonstrates how a bank can reduce the RWA from 100 % to 70 % for a $200 million loan if its overall credit growth is 5 % year‑on‑year.

The Bigger Picture: Basel III and Beyond

This regulation is part of a larger trend in Canada to modernise its banking supervisory framework. After implementing the Basel III “global minimum” capital standards in 2019, OSFI moved to tailor its application to the Canadian context. The current credit‑growth rule reflects an understanding that the “one‑size‑fits‑all” approach of Basel III may not be optimal for a diverse banking sector. By tying capital relief to actual lending performance, OSFI is aiming to strike a balance between prudential oversight and economic dynamism.

Bottom Line

OSFI’s capital‑requirement revision is a calculated gamble: lower capital buffers for banks could boost lending to a key segment of the economy, potentially spurring growth in employment and GDP. The policy’s success will hinge on rigorous monitoring, clear communication to market participants, and a continued emphasis on maintaining high asset quality. Whether the trade‑off between growth and risk will play out favourably remains to be seen, but the regulators’ willingness to adapt the regulatory framework demonstrates a pragmatic response to Canada’s post‑pandemic economic reality.