OSFI faces pressure after US Federal Reserve reduces capital requirements for its largest banks
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), may face renewed pressure to reconsider stricter capital rules for big banks.
According to Financial Post, this comes after the US Federal Reserve signalled a cut in previously announced increases to the capital cushion.
The Fed’s vice-chair Michael Barr stated that instead of a 20 percent increase for some banks, a more lenient nine percent increase would be sufficient for the largest US banks.
This decision followed months of resistance from US banks, who argued that higher capital requirements would restrict their lending capacity.
Barr noted that final decisions are still pending, but banks with more trading and capital market activities will face stricter capital requirements compared to those primarily focused on loans.
Attention is now on OSFI, which implemented new capital requirements last year as part of a global reform framework established after the 2008 financial crisis.
Despite delays and opposition from banks in the US, Europe, and the UK, OSFI agreed in July to delay increases to the capital floor level by one year.
According to a June report by National Bank Financial analyst Gabriel Dechaine, this measure could reduce bank earnings and lending potential.
Some Canadian bankers, including Royal Bank of Canada CEO Dave McKay, have expressed concerns about the competitive imbalance this could create with global peers.
McKay stated last spring that Canada’s capital rules could make its banks less competitive, particularly if US and European banks face less-stringent regulations. He urged OSFI to reconsider its approach, saying a level playing field with Europe and the US was crucial.
In response to questions about the US policy changes, OSFI highlighted its July decision to delay the capital floor increase. The regulator stated that the delay allows time to assess how other jurisdictions implement the undefinedl III reforms.
OSFI remains committed to the principles behind the reforms and noted that the Group of Central Bank Governors and Heads of Supervision reiterated their support in May.
John Aiken, head of Canadian research at Jefferies, pointed out that OSFI has previously taken a different approach than the Fed. While it remains uncertain how the Canadian regulator will proceed, the July pause gives them flexibility. Aiken expects an update before the current pause ends.
RBC’s McKay declined further comment on the latest US developments, and the Canadian Bankers Association referred inquiries to OSFI. The CBA previously stated that it was awaiting more information from OSFI on the review of capital reforms.
