(Bloomberg) -- Canada’s financial regulator is putting a longterm pause on changes to how banks calculate certain lending risks as other countries — including the US — delay their implementation of the most recent round of global financial reforms.
The Office of the Superintendent of Financial Institutions said Wednesday that it will defer increases to the “capital floor level” that would require Canadian banks to calculate more of the risks in their loan books using a standardized model, in lieu of internal methods, “until further notice.”
“Moreover, we commit to notifying affected banks at least two years prior to resuming an increase in the output floor,” Peter Routledge, superintendent of financial institutions, said in a statement Wednesday.
The decision comes after OSFI said last summer that it would delay capital-floor changes for one year. Forcing banks to use standardized risk-assessment models for more of their loan portfolio can increase the level of risk-weighted assets they hold on their books. That in turn can require banks to set aside more capital, and the banking industry argues it makes lending more expensive.
The capital-floor amendments are part of Basel III, the final step in global accords meant to limit financial contagion in the event of a crisis. Canada has already put many of those reforms in place, and Routledge said OSFI remains committed to implementing them in full.
“At present, however, there remains uncertainty about when other jurisdictions will fully implement Basel III,” he said. “We will not extend the implementation lead we share with a small number of fellow jurisdictions.”
New bank capital rules in line with Basel III faced fierce opposition in the US last year and the election of Donald Trump has led many to believe the administration will take a lighter-touch approach to financial regulation.
Delaying the capital-floor changes will save Canada’s Big Five Banks — Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia and Canadian Imperial Bank of Commerce — C$24 billion ($17 billion) in aggregate surplus capital, according to Bloomberg Intelligence analysts Himanshu Bakshi and Paul Gulberg.
“The action suggests the watchdog could also reduce the domestic stability buffer, thereby lowering the banks’ Common Equity Tier 1 hurdle, to boost lending activity, if needed in the event of an economic shock from a potential trade war with the US,” Bakshi and Gulberg said in a report Thursday.
(Updates with analyst comments beginning in eighth paragraph.)
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