Proposed changes could strengthen lending power and increase competition, regulator says
Canada's banking regulator has proposed relaxing financial institutions' capital requirements in a bid to boost Canadian lending and spur greater competition in the banking sector.
The Office of the Superintendent of Financial Institutions (OSFI) launched a 90-day public consultation Thursday on proposed changes to its Capital Adequacy Requirements Guideline (2027), with modifications specifically targeting land acquisition, development and construction (ADC) exposures.
The revisions reflect a deliberate recalibration of how banks measure risk in the residential development space.
OSFI wants to lower the base risk weight for low-rise residential real estate from 150% to 130%, while introducing a 90% risk weight for residential ADC projects where pre-sales equal or exceed 75%.
The changes also allow institutions to treat ADC projects with loan-to-values below 80% as largely complete, applying income-producing commercial real estate treatment upon certificate of occupancy issuance.
Superintendent Peter Routledge signalled a regulatory shift, saying adjusting capital rules could make it more attractive for banks to lend to smaller businesses and boost productivity.
His comments came weeks after Bank of Canada deputy governor Carolyn Rogers criticized the "oligopoly" exerted by the nation's leading lenders. Routledge described it as regulators' "burden of responsibility" to allow smaller challenger institutions to compete.
"It does cause one to wonder: To what extent is the way we allocate bank capital driving economic decisions and are those decisions helpful to the long-term prosperity and productivity for Canada?" he said in remarks to the Economic Club of Canada last month, noting that banks typically hold 10% capital against uninsured residential mortgages versus 50 to 60% for business loans.
Balancing risk and flexibility
The proposed changes extend beyond residential development. OSFI is also lowering risk weightings for corporate small and medium-sized business exposures and unrated non-investment-grade corporate borrowers, potentially making credit more accessible across sectors.
"The proposed revisions are aimed at reducing unnecessary burden without compromising the safety and soundness of financial institutions," OSFI stated in its consultation document, emphasizing that the measures support competitiveness by freeing capacity for expanded lending.
The federal government endorsed the approach in its recent budget announcement, placing OSFI's plans under a section titled "unlocking capital," positioning the rule changes as instrumental to boosting business investment.
The runway ahead
The consultation concludes February 18, 2026, with the final guideline expected in September 2026. Implementation occurs either November 1, 2026, or January 1, 2027, depending on institutions' fiscal year-ends.
For mortgage professionals, expect modestly improved financing conditions for residential development projects, particularly those with stronger pre-sale positions and lower loan-to-value ratios, though macroeconomic headwinds remain a concern.
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