Regulator argued Canada’s biggest banks have room to lend without choking growth
Canada’s top banking watchdog pushed back against claims that high capital demands hobbled the country’s largest lenders, arguing that current buffers sit in a “Goldilocks zone” for both resilience and competitiveness.
A new technical note from the Office of the Superintendent of Financial Institutions (OSFI) benchmarked capital levels at the Big Six banks against peers in the United States, Europe, the United Kingdom and Australia.
The analysis showed Canadian banks operated with Common Equity Tier 1 (CET1) ratios comfortably above OSFI’s 11.5% supervisory expectation and well above the binding 8% minimum, even after layering in the 3.5 percentage point Domestic Stability Buffer (DSB).
“The banks as a group could lend as much as an additional $1 trillion without breaching non-binding regulatory minimums,” superintendent Peter Routledge said in an interview, calling the capital framework “sort of in the Goldilocks zone relative to international peer jurisdictions.”
Capital rules in a ‘Goldilocks zone’
A distinctive feature of Canada’s framework, Routledge said, is the flexibility of the DSB – a rainy‑day buffer that lifted CET1 expectations to 11.5% but does not automatically restrict dividends or buybacks if banks dipped into it. Instead, a breach would prompt a remediation plan rather than immediate sanctions.
“That is why we contend that our system isn’t gold-plated for capital,” Routledge said. Industry groups and analysts have long warned that higher buffers put Canadian banks at a competitive disadvantage, particularly against US rivals.
“That was a direct action we took to respect the industry’s points that, ‘Hey, maybe we’re being a little anti‑competitive,’” he said of OSFI’s earlier decision to pause increases to the standardized “capital floor level.”
Profitability and SME lending in focus
OSFI’s report also underscores that Canadian banks remain among the most profitable large lenders globally, with median returns on equity that rivalled or exceeded many peers. “ROE first and foremost tells us there’s ample earnings as a line of first defence that’s there before capital,” Routledge said.
At the same time, the superintendent acknowledged concerns that credit has not flowed as freely to small‑ and medium‑sized businesses as policymakers hoped.
He linked that in part to post‑crisis risk rules that made it easier to allocate capital to residential mortgages than to business loans.
OSFI has been consulting on lowering risk‑weighted asset density on loans to smaller firms – to roughly 40% from about 55% – to nudge more lending without, in Routledge’s view, bringing “undue risk into the system.”
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