Macklem Says Bank Capital Rule Change Alone Won’t Spark Lending

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(Bloomberg) — Looser bank capital rules alone won’t boost economic activity, according to Bank of Canada Governor Tiff Macklem, echoing analysts who questioned whether a recent regulatory change would immediately spur more lending without borrowers at the door. 

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Macklem said lower capital requirements for Canada’s Big Six banks “won’t hurt,” but added that simply making it easier for them to lend can’t solve the problem of the country’s sluggish business investment. 

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“It’s going to take more than that,” Macklem told reporters in Paris on Tuesday. “You need both companies with projects — that are prepared to take the risk and willing to invest — and then once you get there, you need funding.” 

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The Office of the Superintendent of Financial Institutions took investors by surprise Friday when it lowered the domestic stability buffer — a “rainy day” fund meant to ensure the banks have enough capital on hand to weather financial stress — by 50 basis points to 3%. 

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That means the largest banks must now hold common equity tier 1 capital of at least 11% of risk-weighted assets. They already comfortably exceed that amount, with an average CET1 ratio of 13.5% as of the fiscal second quarter.  

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OSFI also slashed the maximum size of the buffer itself, capping it at 3%. Practically, that gives the banks certainty that their capital requirements won’t suddenly rise for at least the next few years. 

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These were the first adjustments to the buffer in three years and the regulator’s stated intention is to inject more flexibility for lending to sectors that are key to improving the domestic economy — defense spending, infrastructure and artificial intelligence, for example. 

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But the changes don’t adjust the risk-weightings assigned to commercial loans, which are significantly higher than investments such as residential mortgages that make up a large part of the banks’ lending portfolios. And analysts noted that more bank capital alone also can’t prod businesses into seeking funds for investment decisions they’ve been putting off due to economic uncertainty.

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Loan growth at the Canadian banks has been low or even flat in recent quarters amid a lack of commercial demand plus a stalled housing market.  

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Policy Decision

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OSFI’s capital changes followed talks with other federal bodies, including the Department of Finance. Peter Routledge, the superintendent of financial institutions, said the regulator also consulted with the financial institutions committee at the Bank of Canada. 

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The move was a “policy decision,” according to Jefferies Financial Group Inc. analyst John Aiken, who believes the goal is to support Prime Minister Mark Carney’s rollout of his “grand plans in his infrastructure and transformation planning in order to make Canada more competitive in its global exports.” 

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The banks now have “significant incremental firepower” to deploy “as Canada begins to execute on its infrastructure-led growth strategy,” Aiken wrote in a report Monday. 

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Aiken does expect a “big infrastructure push” in the coming years, but doesn’t see an immediate demand. “We are not aware of any major projects that have been shelved because of an inability to fund.” 

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It’s not bank capital that’s restricting lending, Aiken wrote. “In fact, we believe that the banks would be happy to generate incremental loans, but the demand has not surfaced. 

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