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Regulator plans changes to encourage business lending by banks in support of economy

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  Published in Business and Finance on Thursday, September 4th 2025 at 12:04 GMT by The Globe and Mail
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Regulators Urge Banks to Keep Lending Momentum to Bolster the Canadian Economy

In a decisive move aimed at sustaining the country’s post‑pandemic recovery, Canada’s top financial regulator has released a set of new guidelines that encourage banks to maintain—and in some cases increase—business lending. The guidance, issued by the Office of the Superintendent of Financial Institutions (OSFI), comes at a time when small and medium‑enterprise (SME) credit demand is still high, yet banks remain cautious amid a backdrop of rising inflation and uncertain macro‑economic conditions.

A Clear Call to Action

OSFI’s statement, which can be read in full on the regulator’s website, emphasizes that “financial institutions play a critical role in supporting the real economy by providing credit to businesses of all sizes.” The agency notes that, following the COVID‑19 pandemic, many Canadian businesses have struggled to secure working‑capital loans. To counteract this trend, OSFI is issuing guidance on “enhanced credit risk assessment and capital planning” that will make it easier for banks to extend loans without compromising regulatory capital requirements.

According to OSFI, banks have already increased their business‑lending volumes in 2023—totaling roughly CAD $70 billion, up 12 percent from the previous year. Still, the regulator stresses that this growth is “insufficient to meet the continued demand for working‑capital loans, especially from smaller firms that historically have had limited access to credit.” The new guidance will, therefore, provide a framework for banks to streamline their underwriting processes, potentially reducing the time it takes to approve a loan from weeks to days.

Capital Relief and Risk‑Weighting Adjustments

A key element of the guidance is a proposal to temporarily relax certain risk‑weighting rules for SME loans. Under the current Basel III framework, banks must hold capital against loans at risk weights that often range from 35 percent to 75 percent, depending on the borrower’s creditworthiness. OSFI’s new recommendation allows banks to apply a “conservative 15 percent risk weight” to loans secured by government guarantees, effectively reducing the capital charge.

This capital relief would free up more funds for banks to lend. In practice, a bank that can reduce its risk‑weighted asset (RWA) requirement by 1 billion CAD might be able to issue an additional CAD $5 billion in loans, according to the regulator’s own estimates. Importantly, the guidance stipulates that the risk‑weighting reductions will only apply to “fully secured, short‑term loans” and that banks must still maintain appropriate supervisory review.

Strengthening the Small‑Business Credit Guarantee Program

The regulator’s guidance dovetails with a federal initiative to expand the Small‑Business Credit Guarantee Program (SBCGP). This government‑backed guarantee scheme, launched in 2021, offers a 90‑percent guarantee on loans up to CAD $2 million. The goal is to shift a large portion of risk from banks to the federal government, thereby encouraging banks to extend credit to businesses that might otherwise be viewed as too risky.

OSFI’s statement references the SBCGP website (https://www.canada.ca/en/services/finance/business-support/credit-guarantee.html) and urges banks to advertise the program more aggressively. The regulator also hints at a potential policy shift that would allow the government to guarantee loans up to CAD $5 million for high‑growth “innovation‑driven” SMEs, a move that could further reduce banks’ exposure.

Balancing Growth with Prudential Safeguards

While the new guidance is clearly pro‑lending, OSFI is careful to stress that banks must still manage risk prudently. The regulator re‑asserts the importance of “sound credit assessment and robust collections processes” to prevent a buildup of non‑performing loans. OSFI will monitor banks’ balance‑sheet composition and credit portfolios closely, with the potential for supervisory intervention if a bank’s loan‑to‑deposit ratio or other risk metrics exceed acceptable thresholds.

The guidance also recommends that banks adopt a “risk‑based pricing” approach, ensuring that borrowers who pose a higher credit risk are charged commensurately higher interest rates. This practice protects banks’ profitability while still encouraging them to serve the broader SME market.

Industry Reactions

Bankers and industry groups have largely welcomed the new guidance. The Canadian Bankers Association (CBA) issued a statement that read: “We appreciate OSFI’s forward‑looking approach. The proposed risk‑weighting adjustments and the strengthened SBCGP will give our institutions the flexibility they need to support the small‑business sector.”

Conversely, a coalition of SME advocacy groups, including the Canadian Small Business Alliance, cautioned that the changes must be implemented quickly. “SMEs are still feeling the squeeze of supply‑chain disruptions and higher input costs,” said Alliance president Mark Larkin. “Any delay in accessing credit could slow down their growth trajectory.”

What This Means for the Canadian Economy

Economists agree that boosting business lending is a key lever for economic growth. A recent report from the Bank of Canada (https://www.bankofcanada.ca/) highlights that SME credit growth is directly correlated with job creation and innovation. With the new OSFI guidance and the expanding SBCGP, banks will be better positioned to provide the necessary capital to businesses that drive productivity gains.

At the same time, the regulator’s emphasis on risk management will likely prevent a resurgence of the credit bubbles that plagued the global economy in the 2000s. By striking a balance between pro‑lending policies and prudential oversight, OSFI aims to create a more resilient banking sector capable of supporting the Canadian economy’s long‑term recovery.

In Summary

Canada’s financial regulator has taken a proactive stance to encourage banks to sustain their lending momentum to businesses—particularly SMEs—through a mix of capital relief, risk‑weighting adjustments, and strengthened government guarantees. While the new guidelines signal a clear push for growth, OSFI’s insistence on prudent risk management ensures that the sector’s stability remains intact. As banks and businesses navigate these changes, the Canadian economy stands to benefit from a more robust credit market that fuels job creation, innovation, and sustained economic expansion.