Canada’s banks could lend an additional $1 trillion to help economy adapt, federal regulator says

“Canada's banks have ample capacity to help fund the country's adjustment in this new era,” says Peter Routledge, head of the Office of the Superintendent of Financial Institutions. Photo by Cole Burston/Bloomberg

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Canada’s federal banking regulator is considering loosening lending rules for the country’s largest banks to encourage business loans, with one scenario applying to money loaned for public-private infrastructure development.

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Peter Routledge, head of the Office of the Superintendent of Financial Institutions, said in a speech Wednesday that OSFI is looking at changing the capital treatment of certain types of business loans because Canada’s banks have built up substantial capital cushions. At the same time, encouraging business lending by banks could shore up the economy amid challenging geopolitical times and a months-long trade war with the United States, Routledge said.

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He said there is room to ease up now because the country’s banks have weathered crises from the COVID-19 pandemic to fallout from the failure of Silicon Valley Bank.

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“Banks could make nearly $1 trillion in additional loans or other extensions of credit … and remain above current capital minimums,” he said, adding that this is a material amount relative to Canada’s $3-trillion economy.

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“Canada’s banks have ample capacity to help fund the country’s adjustment in this new era.”

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Rather than looking at the resilience built into the system following the 2008 financial crisis as merely a safeguard, there should be a way to use it as a catalyst for national prosperity, he said, adding that OSFI is calling on the banks to come to the regulator with ideas for how this will be accomplished without adding too much risk to the system.

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“We see the system’s resilience as a strategic advantage to be leveraged to support Canadian businesses and households as the country adapts,” he said, comparing the consideration of bank business lending changes to OSFI’s July decision to shave capital requirements on infrastructure investments by life insurers.

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“When banks, insurers and pension plans are well regulated, adaptable and capable in managing their risks, Canadians benefit from reliable access to credit and financial services to stronger support … businesses and communities.”

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Following his speech, Routledge said the worries triggered when the U.S. initiated the trade war early this year — which had prompted OSFI to prepare for possible pandemic-style measures to shore up capital — had not resulted in poor outcomes for banks, which have continued to post strong profits so far this year.

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The Canada-U.S.-Mexico Trade Agreement (CUSMA) comes up for review next July, a process kicked off Tuesday by the Office of the U.S. Trade Representative. Some trade lawyers and economists are predicting that U.S. President Donald Trump’s administration will seek major concessions from Canada.

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“I’m optimistic the resilience we built in the (banking) system could handle a less favourable outcome (on trade),” Routledge said Wednesday. “I would prefer that any renegotiation of CUSMA would have maximum benefits and minimal costs for the country. If that is not the case, the system will be prepared and has the resilience to adapt.”