The Office of the Superintendent of Financial Institutions (OSFI) — the supervisor of our federally regulated lenders — wants to free up more credit for your next business venture.
Driving the news: OSFI has launched a 90-day consultation on proposed changes to loosen capital requirements for credit risk, with a focus on making loans for low-rise residential real estate projects and small and medium-sized businesses (SMBs) more viable.
Catch-up: For every loan a bank gives out, it must keep a rainy day fund to help cover things in case the loan goes bad (these are called capital requirements). Loans that are deemed less risky require banks to tuck less money away, while riskier loans require more.
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For example, OSFI said that banks typically store 10% of the value of an uninsured residential mortgage, compared to a rate of 50% to 60% for most business loans.
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OSFI feels that loans for low-rise real estate and SMBs aren’t as risky as their high capital requirement rates would suggest, causing unnecessary barriers to lending.
Why it matters: The rationale for the changes is simple. Freeing up more cash could spur banks to give more loans to certain real estate projects and SMBs, which in turn would play a small, yet significant, role in driving new housing and business creation. It’s worth mentioning here that SMBs employ over 60% of Canada's private labour force.—QH