Financial institutions

could free up more capital for investing and lending if new rules proposed by Canada’s

top banking regulator

are put in place.

The proposed changes announced on Thursday by the

Office of the Superintendent of Financial Institutions

(OSFI) in its quarterly release could help Canada adjust to a “rapidly changing environment” and contribute to

economic growth

, it said.

“Changes are being made so that the capital better reflects the risks,” Jacqueline Friedland, executive director of OSFI, said at a press conference on Thursday. “There are very targeted changes that could give financial institutions more flexibility to free up capital for investing and for lending, and we believe that the changes support competitiveness while maintaining stability and soundness in the financial institutions.”

One of the proposed changes is lowering the risk weight for loans given to

small and medium-sized businesses

to 75 per cent from 85 per cent.

Risk weights are like scores that regulators provide to different loans that a bank owns and essentially mark

how risky a loan is likely to be.

Banks need to keep aside a certain amount of money for safety in case a loan goes bad. The riskier the loan, the higher the risk weight or the more money that a bank needs to hold as a buffer.

OSFI also wants to change the risk weights of certain loans provided to the real estate sector. For example, it wants to lower the base risk weight for low-rise residential real estate to 130 per cent from 150 per cent to “better reflect the lower risk nature of low-rise residential builds.”

The risk weights for loans given to projects where the level of pre-sales is equal to or greater than 75 per cent would be much lower.

OSFI has launched a 90-day public consultation to receive feedback on its proposed changes, which were announced almost a month after OSFI head Peter Routledge said the regulator is looking at changing the capital treatment of certain types of business loans because Canada’s banks have built up substantial capital cushions.

Encouraging business lending by banks could shore up the economy amid challenging geopolitical times and a months-long trade war with the United States, he said.

“Banks could make nearly $1 trillion in additional loans or other extensions of credit … and remain above current capital minimums,” he said at an event in September, adding that this is a material amount relative to

Canada’s $3-trillion economy

. “Canada’s banks have ample capacity to help fund the country’s adjustment in this new era.”

Rather than looking at the resilience built into the system following the 2008 financial crisis as merely a safeguard, Routledge said there should be a way to use it as a catalyst for national prosperity. He also said OSFI is calling on the banks to come to the regulator with ideas on how this will be accomplished without adding too much risk to the system.

The proposed loosening of these rules has also come at a time when Ottawa is looking to boost competition in the

financial sector

. The federal government’s

latest budget

vowed to introduce a series of measures — from cutting fees to simplifying the process of switching chequing accounts — to encourage alternative financial institutions outside the

Big Six banks

to grow.

The government said that it intends to publish draft regulations by spring 2026 to prohibit investment and registered account transfer fees that are currently costing Canadians $150 per account on average.

To help smaller financial institutions compete, the budget also proposed measures that will make it easier for federal and provincial credit unions to grow.

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• Email: nkarim@postmedia.com