OSFI Superintendent Peter Routledge provided an update on implementation of the 2017 Basel III reforms, noting that Canada is ahead of other jurisdictions in this regard, and subsequently has slowed implementation of one key element of the reforms: The capital floor. Responding to concerns about the potential impact of OSFI’s calculation of the capital floor on economic growth, the Superintendent asserted that the net impact on capital is negligible, that the benefits of healthy capital surpluses outweigh the costs, and that a capital floor adds model risk discipline and competitive balance to the Canadian banking system.

In conversation with Sonia Baxendale, Superintendent Routledge stressed the importance of balancing capital requirements with supporting economic growth, adding that growth actually strengthens the resilience of the system. The two discussed issues surrounding the Minimum Qualifying Rate, which the Superintendent said is problematic because: a) it failed to prevent a substantial buildup in mortgages with very high loan-to-income ratios during COVID; and b) it can create the perception that OSFI is regulating the borrower, which is outside OSFI’s mandate. Among possible remedies, Routledge outlined the loan-to-income test, modeled after the UK approach. While it would have to be calibrated institution by institution for use in Canada, the Superintendent argued that it would have largely eliminated the risk concentration seen during the pandemic, and would address the perception issue because it does not involve regulating borrowers.

The discussion also touched on consolidation risk, the slow pace of AI regulation, and updates on Guideline B-15 and OSFI’s Integrity and Security Guideline.