The Office of the Superintendent of Financial Institutions (OSFI) said on Thursday that the proposed revisions to the Capital Adequacy Requirements (CAR) Guideline and Medium-Sized Deposit-Taking Institutions (SMSB) Guideline are “are aimed at improving the financial resilience and stability of our deposit-taking institutions.”
The key proposed changes include:
- Adjustments to how income-producing residential real estate and U.S. government-sponsored entities are classified.
- Aligning market risk rules with the Basel Framework and updating the credit valuation adjustment framework.
- Removing references to Bankers’ Acceptances and CDOR following CDOR’s phase-out in June 2024.
“Contributing to and supporting public confidence in Canada’s financial system is OSFI’s top priority, said Superintendent Peter Routledge. “The guidance released today provides financial institutions with a look ahead to our expectations so that they can reinforce their resilience to risk.”
Basel III capital floor on hold
At the same time, OSFI is hitting pause on planned increases to the Basel III capital floor, citing competitive concerns for Canadian banks operating internationally.
OSFI initially announced the delay in June after concerns were raised that Canada was moving forward with the change too quickly, putting its banks at a disadvantage while those same standards face resistance and delay south of the border.
OSFI had planned to raise the Basel III output floor from its current 67.5%, which would have required banks using internal risk models to hold more capital.
“We recognize that requiring Canadian banks to conform to certain elements of Basel III while other jurisdictions are slower to adopt these standards creates competitive challenges for Canada’s banks operating internationally,” OSFI said today.
That increase is now on hold indefinitely, with OSFI saying banks will get at least two years’ notice before any future changes.
Why it matters and next steps
Capital rules ensure banks have enough buffer to absorb losses, protecting depositors and preventing financial crises like 2008. Deferring the Basel III floor eases pressure on Canada’s big banks but raises questions about when, or if, the full rules will be implemented.
Industry analyst Morningstar DBRS Inc. said in a recent note that it expects a “multi-year delay in Canada’s adoption of the Basel III reforms. However, DBRS maintains that even with the output floor at its current level, Canadian banks remain “quite resilient to potential large economic shocks.”
“This is particularly critical in the current environment of heightened geopolitical risks and uncertainty about U.S. policy changes, including tariffs, which could adversely change the Canadian macroeconomic outlook, with clearly negative repercussions for the Canadian banking sector,” it said.
The public consultation runs until April 22, 2025. OSFI will hold a virtual Industry Day on March 6, 2025, to discuss the proposed changes. Feedback can be sent to Consultations@osfi-bsif.gc.ca.
Basel III capital adequacy requirement consultation period Morningstar DBRS Office of the Superintendent of Financial Institutions OSFI regulator regulatory notice
Last modified: February 20, 2025
