Canada’s Financial Regulator Delays New Bank Lending Risk Rules

Canada’s financial regulator announced on Friday that it will delay the implementation of new rules requiring banks to change how they calculate lending risks, a move intended to give the country’s banks more time to adapt, Bloomberg has reported.

The Office of the Superintendent of Financial Institutions (OSFI) said the regulations on “capital floor levels” will be postponed by one year.

These changes, which were to be phased in over several years, are part of the global Basel III accords designed to limit financial contagion during a crisis.

The delay means Canadian banks will have more time before they need to calculate more of the risks in their loan books using a standardized model rather than their internal methods.

While Canada remains ahead in implementing many of the Basel III reforms, Friday’s extension allows OSFI to consider the implementation pace in the United States and other countries.

At a recent hearing of the US House of Financial Services Committee, members shared the concern that “U.S. financial regulators, including federal banking agencies, have, in effect, increasingly ceded portions of their authority to international and domestic intergovernmental organizations.” Some Representatives have stated concerns about an increased cost for consumers while providing little additional safeguards for the banking industry.

It also provides Canadian banks additional time to get their financials in order.

New bank capital rules proposed in the U.S. last summer have faced strong opposition from lenders, with lobbyists arguing, the plan would harm competition and make loans less affordable. U.S. officials have not yet reached an agreement, but there are indications the proposal may be scaled back.

This ongoing debate has highlighted Canada’s progress in implementing the changes.

Delaying the capital floor changes removes a potential economic obstacle as some analysts have warned that the rules could further stifle loan growth at a time when Canadian households face rising unemployment and higher borrowing costs.

In a report to investors, Bank of Nova Scotia Chief Economist Jean-Francois Perrault cautioned that the original implementation plan for the new rules could reduce lending to households and firms by about 9% of nominal GDP “at a time of elevated financing needs.”

He noted that “risk-weighted assets are overwhelmingly in corporate and retail lending,” and any asset shedding would likely concentrate in these areas, resulting in banks lending less to companies and individuals.

National Bank of Canada analysts, led by Gabriel Dechaine, warned last month that while the intent of the capital-floor rules is to ensure banks properly reflect the risk in their loan books, “conservative capitalization has a cost.”

In a report to clients on June 18, they modeled the impact of applying the full output floor to the Canadian banks’ most recent quarterly balance sheets and estimated that an additional C$80 billion in risk-weighted assets would hit the sector.

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