Canada’s Bank Regulator Moves to Loosen Capital Rules and Encourage Lending to SMEs

Canada’s economic growth has slowed in recent years, with business investment lagging and productivity measures falling behind peer economies. Ottawa has signalled that revitalization may well begin with those institutions that have remained resilient: the country’s major banks. It is in this spirit that the Office of the Superintendent of Financial Institutions (“OSFI”), Canada’s federal bank regulator, has come forward with new regulations to increase the origination of new business loans by adjusting the prudential standards for Canadian financial institutions.

On November 20, 2025, OSFI launched a 90-day public consultation on draft revisions to the Capital Adequacy Requirements (“CAR”) Guideline. Nothing in the text announces a grand turn in policy: the numbers shift by degrees, and the language remains resolutely macroprudential. However, the subtext is important to note. The bank regulator is signalling to Canada’s largest lenders that they have capacity to put more capital to work – and should.

What Are the Capital Adequacy Requirements

The CAR Guideline provides the foundation for how Canadian deposit-taking institutions measure risk and determine how much capital they must hold.

Subsections 485(1) and 949(1) of the Bank Act and subsection 473(1) of the Trust and Loan Companies Act require banks (and other federally regulated lenders) to maintain adequate capital. The CAR Guideline is not enacted as regulation with the force of law but rather sets out (along with other OSFI Guidelines) the framework within which the Superintendent assesses whether a financial institution maintains adequate capital under the Acts.

As banks are required to hold more capital, they become more resilient but face greater constraints on lending. Over recent years, and particularly since the 2008-2009 financial crisis, OSFI has emphasized stability and a strengthening of regulatory controls. For instance, OSFI has maintained a high Domestic Stability Buffer, currently set at 3.5% of risk-weighted assets, requiring banks to hold tens of billions in additional capital.

Key Changes: Lower Risk Weights for Core Lending Activity

The substantive changes to the CAR Guideline focus on credit risk requirements, which are central to how banks calculate risk-weighted assets (“RWAs”). RWAs help measure how risky a bank’s assets are. Instead of treating all loans and investments the same, RWAs assign different “weights” based on how likely the bank is to lose money on them. The riskier the asset, the higher the weight. Lower RWAs translate directly into lower regulatory capital-holding requirements and greater lending capacity for financial institutions.^[1]

Real Estate Construction & Development Loans

Real estate development financing is sensitive to capital rules because construction loans are traditionally treated as higher-risk exposures. OSFI is proposing several targeted adjustments related to how land acquisition, development and construction (“Development”) lending exposures are treated under the Standardized Approach for credit risk, including:

• Base risk weight for low-rise residential construction reduced from 150% to 130%. This will align risk weights more closely with what the regulator says is the demonstrated lower-risk profile of low-rise development projects.
• Preferential 90% risk weight for residential Development (high- and low-rise) where 75% or more of units are pre-sold. Based on the regulator’s comfort that high pre-sales significantly de-risk projects.
• Preferential 110% risk weight for commercial Development with 50% pre-leases or pre-sales to 70% loan-to-values (“LTV”).
  
• Recognition of “substantially complete” status at LTV < 80% where a certificate of occupancy has been issued. Allowing institutions to consider Development projects with LTVs lower than 80% as substantially complete and apply the income-producing commercial real estate treatment, which generally carries lower capital charges.^[2]

If implemented, these adjustments would reduce lenders’ capital-holding requirements for well-structured construction projects, precisely the type of Development capital that governments across Canada are trying to stimulate.

Small- and Medium-Sized Business (“SME”) Lending

OSFI Superintendent Peter Routledge has remarked that OSFI’s risk-weighting rules for banks often make it more costly to lend to SMEs than to other customers, including individuals (i.e., on residential mortgage loans). Under the new guidelines, OSFI will:

• Lower the risk weight applied to Corporate SME exposures from 85% to 75%.
  
• Lower the risk weight for unrated investment-grade corporate exposures from 150% to 135%.^[3]

These reductions are expected to reduce capital requirements in order to encourage more business lending. For SMEs, which account for the bulk of Canada’s private-sector employment, the change could help reduce borrowing costs and improve access to credit.

Interbank Lending

The revised Guideline also lowers the risk weight on exposures to Canadian systemically important banks from 20% to 15%. This reduces capital requirements for interbank transactions and covered bonds. It also reflects OSFI’s confidence in the strength of Canada’s largest financial institutions.

Broader Regulatory Shift for Lending Regulation

OSFI’s revisions to the Capital Adequacy Requirements are both technical and limited in scope. However, the policy-setting undertones are perhaps more salient. With well-capitalized banks and an economy in need of a stimulant, lenders are seemingly being called upon to play a larger role in financing Canada’s economic throughput.

This is not an isolated occurrence. For instance, earlier this year, OSFI suspended Canada’s implementation of the “Basel III” macroprudential reforms. The Basel III standard was internationally endorsed after the 2007-09 global financial crisis by the Basel Committee on Banking Supervision convened by the Bank for International Settlements. Canada has been working for several years to fully implement the Basel III rules but announced in February 2025 that implementation efforts would be paused to help Canada’s internationally active banks compete more effectively against global peers.

While OSFI appears content to ease prudential standards on the commercial side, it has moved in the opposite direction with consumer debt, where the risks are judged to be more immediate. For instance, OSFI recently implemented new loan-to-income restrictions that limit a bank’s residential mortgage loan portfolio, ensuring the majority of mortgage loans do not exceed 450% (x 4.5) of a borrower’s income.

Despite Ottawa’s bid to coax more lending through relaxed regulation, it bears remembering that, even before these proposed guidelines, Canadian banks were already sitting comfortably above their capital floors. For example, Canada’s largest banks recently reported Common Equity Tier 1 ratios that averaged 13.7%, 220 basis points above the floor for a well-capitalized, systemically important bank. One way to think about this is that banks could make nearly $1 trillion in additional loans or other extensions of credit while remaining above current capital minimums.

What this implies is that aspirations for increased lending may ultimately depend less on whether banks see the rule-loosening as an invitation to expand their balance sheets, and more on whether a critical mass of creditworthy SMEs actually has genuine financing needs. But with balance sheets as strong as they are, the regulator has now made clear that the door to additional lending is open.

The Financial Services Group at Aird & Berlis LLP will continue to monitor regulatory developments impacting Canadian lenders and lending trends in Canada. If you have questions regarding OSFI’s latest reforms, please contact the author or a member of the group.

^[1] Risk-Weighted Assets (RWAs) - Office of the Superintendent of Financial Institutions.