By Nivedita Balu
OTTAWA (Reuters) -Canada’s banking regulator wants the country’s biggest financial institutions to take “smart” risks to expand their lending and is open to adjustments in its capital rules to accommodate that goal, its head said.
“We want them to take smart risks,” Peter Routledge, the head of the Office of the Superintendent of Financial Institutions, said in an interview late last week.
“And we’re open to conversations about how assessing those smart risks might need to change through our capital requirements or our liquidity requirements,” he added.
Canada’s top six banks, which control roughly 90% of the market, are among the most resilient banks in the world, supported by OSFI’s strict requirements for reserves to shield them from loan defaults.
Known as the Big Six, Royal Bank of Canada, TD Bank, Bank of Montreal, Bank of Nova Scotia, CIBC and National Bank of Canada hold excess capital of about C$70 billion ($50.6 billion) combined, according to Reuters calculations, after meeting the 11.5% requirement.
OSFI is expected in November to adjust capital treatment for certain commercial loans that would change how banks lend to businesses, potentially unlocking up to C$1 trillion in additional loans.
Routledge noted that the banks made roughly 60% of their loans to businesses and 40% to households in the 1980s, but that trend has reversed. The ratio is roughly about 73% to 27% in favor of mortgages, typically a low-risk loan compared with commercial loans.
He now wants banks to pivot more towards commercial loans.
“What we’re saying to the industry is … are there some adjustments we can make that might make certain forms of lending more attractive to you?” he said, adding that constituents had said the regulator was “too conservative.”
Canada is holding talks with the U.S. on a new economic and security relationship and has announced an increase in military and defense spending.
Routledge noted that the resilience built in the banking system can be leveraged to help finance Canada’s economic transition, financing industries from manufacturing plants to pipelines.
“Our openness to understanding the intelligence of that risk-taking is very high,” he said.
Veritas Investment Research analyst Shalabh Garg is skeptical that loosening rules around capital backing for business loans will change banks’ approaches to risk management.
Citing conversations with management teams, he believes Canada’s banks will make decisions on commercial loans based on the risk they are willing to take in the current environment.
($1 = 1.3822 Canadian dollars)
(Reporting by Nivedita Balu in TorontoEditing by Marguerita Choy)
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