I did not think it was possible for OSFI to bring greater disgrace upon itself than it did in the debate over a Principal Loss Absorbency Mechanism (PLAM) for insurers, which would have applied NVCC-like rules to insurer Tier 1 Capital.
But they’ve done it, by planning to become another rah-rah branch of government:
Canada’s banking regulator is working to change the way it treats some business loans, in an effort to make it more appealing for banks to lend to companies that are key to Ottawa’s plans to reshape the country’s economy.
The head of the Office of the Superintendent of Financial Institutions (OSFI), Peter Routledge, said Wednesday that the regulator is consulting with banks and life insurers “to help them help the country,” at a conference in Toronto held by Bank of Nova Scotia.
The forthcoming changes are intended to “rebalance” a highly technical set of rules by which the regulator assigns different levels of risk – known as “risk weightings” – to different types of bank loans.
Those weightings help determine how much capital a bank has to hold in reserve against its loan portfolio, which in turn shapes decisions about who gets loans and how much banks lend.
The justification for this has been reported as:
Whereas commercial lending accounted for about 60 per cent of banks’ loan portfolios in 1982, it now makes up about 25 per cent of current loan books, he said. That is partly because risk weightings on business loans are often three to four times higher than loans to households, such as a mortgage, which skews their relative profitability.
The result has been that banks in Canada and abroad have pulled back on some types of lending to small and medium-sized businesses, as well as large corporations. In the U.S., a booming private credit sector has seen investors raise vast pools of capital to make direct loans to private companies, often at higher interest rates. But in Canada, banks are still the main source of capital for many businesses.
If the trend away from business lending continues, it could constrain new economic investment and growth. OSFI’s initiative to tweak risk weightings seeks to help rebalance the mix of bank loans.
Excuse me? OSFI states that its mandate is:
Our mandate
Our purpose is to contribute to public confidence in the Canadian financial system by regulating and supervising approximately 400 federally regulated financial institutions (FRFIs) and 1200 federally regulated pension plans (FRPPs).Our mandate is to:
ensure FRFIs and FRPPs remain in sound financial condition
ensure FRFIs protect themselves against threats to their integrity and security, including foreign interference
act early when issues arise and require FRFIs and FRPPs to take necessary corrective measures without delay
monitor and evaluate risks and promote sound risk management by FRFIs and FRPPs
In exercising our mandate:for FRFIs, we strive to protect the rights and interests of depositors, policyholders and financial institution creditors while having due regard for the need to allow FRFIs to compete effectively and take reasonable risks
for FRPPs, we strive to protect the rights and interests of pension plan members, former members and entitled beneficiaries
I don’t see anything in there about making it easier for business to borrow money.
The only question relevant to the issue that OSFI has any conceivable business looking into is: do risk weightings reflect actual risks?
The rationale has been extended:
Banks’ lending to the defence sector, in particular, “is arguably a little low,” but in recent decades that has been more because of modest Canadian investment in defence, rather than regulatory constraints, Mr. Routledge said.
OSFI would at least consider adjusting risk weightings for defence lending – especially if new public-private partnerships are created – to encourage lenders to support Canada’s loftier spending targets for national security, he said.
“Until I see a proposal I can’t really say, but we are open for business on considering that,” he said.
It is none of OSFI’s damn business whether Canada meets loftier spending targets for national security. That’s a fiscal issue, a policy matter for government. If the banks find it more profitable to fund mortgages rather than guns, so be it: if the government wants a policy response it should make one, rather than allow some kind of back-room machination to cast a mask of respectability over the adjustment. For instance, I believe it would be good policy to cut back on CMHC mortgage guarantees, particularly portfolio insurance. The ready availability of mortgages and insurance thereof has, I think, been a major factor in skyrocketting housing prices over the past twenty years.
I want OSFI to do one job – ensure that banks and insurers are “adequately” capitalized, whatever the word “adequately” means. There is no reason for them to get into the central planning business.
Update, 2025-9-4: The logical place to start using government leverage to increase business lending would be the Business Development Bank, but sadly, they’re not doing too well:
Business Development Bank of Canada hiked provisions for expected loan losses sharply in its fourth quarter, reflecting the potential hit from U.S. tariffs on the small and medium businesses financed by the federal Crown corporation.
BDC ended its 2025 fiscal year on March 31 with a $624.3-million provision for expected credit losses on loans, according to its annual report, published on its website. That’s up from $465.6-million three months earlier.
Its level of impaired loans jumped by 86 per cent year-over-year, reaching $514.4-million. Provisions for credit losses have jumped in each of the past three years. BDC subsequently booked a $160-million provision for credit losses in the first quarter of its 2025-26 fiscal year.
BDC provides loans and advisory services to small and medium-sized Canadian businesses and makes venture and growth capital equity investments in startup and scaleup companies and third-party funds that back them. BDC also manages capital incentive programs on behalf of the government, including the Venture Capital Catalyst Initiative, a fund for financing Indigenous entrepreneurs and some COVID-relief programs for small business. It had $42.8-billion in outstanding loans on its books on June 30 and $6.4-billion in investments
…
But BDC’s financial results have disappointed. Its annual net income in each of the last three years, including $402.3-million in fiscal 2025, were the three lowest results of the past 14 years, excluding the pandemic year of 2020 when the Crown corporation posted a rare net loss. BDC also declared a $50-million dividend payable to the government in its 2026 fiscal year, down from $337-million in each of the prior two years.Return on common equity last year was 4.7 per cent, BDC’s best performance in three years but below its 5.9-per-cent target mainly owing to the higher levels of credit loss provisions in its financing business. That compares to returns on equity that typically surpassed 10 per cent every year going back to at least 2011, except for the pandemic year of 2020, and 2017, when it was 8.2 per cent.