National Bank chief executive Laurent Ferreira in Montreal in 2022. Mr. Ferreira said Canada should make more targeted reductions to risk weightings for loans to small and medium-sized enterprises.Christinne Muschi/The Globe and Mail
National Bank of Canada NA-T chief executive officer Laurent Ferreira says the country’s banks need certain capital constraints eased to encourage lending to small businesses.
The United States is moving toward lowering capital requirements levied on banks, and the changes could release billions of dollars for lending, dividends and share buybacks.
The changes have prompted questions over whether Canada’s tighter capital requirements disadvantage the country’s banks and discourage lending while Ottawa is encouraging investment to stimulate the economy.
In recent years, Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, has hiked the domestic stability buffer (DSB) – capital that banks must maintain to guard against the blow of an economic downturn – prompting lenders to hold onto billions of dollars in excess cash.
Mr. Ferreira said Canada should make more targeted reductions to risk weightings for loans to small and medium-sized enterprises (SMEs).
Risk weightings – the different levels of risk assigned to certain types of bank loans – determine the amount of capital a bank must reserve against its loan portfolio. That influences decisions about how much banks lend and to whom.
“You can’t lower the DSB and play that yo-yo, and just say we need banks to be more aggressive,” Mr. Ferreira said at a conference held by National Bank in Montreal on Tuesday. “It’s not about that. It’s really about [risk-weighted assets] treatment for SMEs.”
U.S. President Donald Trump’s administration has been pushing for deregulation in the industry. Last week, the Federal Reserve unveiled proposals to relax capital requirements for Wall Street banks, with the regulatory overhaul aimed at helping traditional lenders compete with non-banks and private credit institutions.
The overhaul followed a 2023 campaign by major banks to oppose a plan under the Biden administration to significantly increase capital requirements.
Proponents of Canada’s financial system attribute the industry’s global reputation for stability, especially during the 2008 financial crisis, to its tight regulatory environment. But geopolitical turmoil and technological advances are drastically changing the risks facing financial institutions.
“Now we’re faced with a very, very different world,” OSFI superintendent Peter Routledge said at the conference.
“Our geopolitical and technological and financial environment for the next 20 years is going to be very different from the last 20, so regulators are beginning to ask, do we look backward to make changes, or should we look forward? I think the better regulators are looking forward.”
Over the past year, OSFI has adjusted its treatment of specific types of debt in a bid to boost lending. In November, the regulator said it could lower capital requirements for certain corporate and real estate properties. It also lowered capital requirements in July for life insurers investing in Canadian infrastructure through debt or equity.
Mr. Routledge said Canada’s banks have also been proposing changes to the regulator’s approach to capital requirements.
“As a regulator, we probably don’t grant the full suggestion or agree with the full suggestion from our regulated constituents, but it comes from somewhere,” the superintendent said.
“They’re trying to make money, and they make money by contributing to the growth of the Canadian economy, so it bears consideration. We incrementally experiment and see what happens, and we consistently refine and refine.”
Mr. Ferreira said the banks have an open and strong relationship with OSFI, but he would like the regulator to make changes faster.
The CEO said “the world is dangerous” and the government must accelerate its efforts to export its resources to global markets as geopolitical and economic tensions escalate. More must be done to reduce interprovincial barriers and bolster energy supplies, Mr. Ferreira said.
Canada should export more liquefied natural gas and revive the Keystone XL pipeline project to the United States, he said.
“The cost to our economy is ridiculous, and the only thing slowing down progress there is politics, nothing else,” he said, referring to interprovincial barriers. “On becoming an energy superpower, it starts with that. Your security, your economic sovereignty – anywhere in the world, it starts with being an energy superpower.”