More capital, less friction: rethinking OSFI rules for Canadian growth

The C.D. Howe Institute established the Task Force on Office of the Superintendent of Financial Institutions (OSFI) Prudential Requirements and Business Lending (the Task Force) in response to several OSFI statements issued in the fall of 2025¹. The Task Force released its final report today, entitled “Rethinking Prudential Rules to Strengthen Canada’s Economy Through Improved Business Lending” (the Report), which details near-term and longer-term adjustments that OSFI could institute to improve the flow of credit to Canadian businesses. These changes, if implemented, could meaningfully impact the availability of credit to small and medium-sized enterprises (SME). A full copy of the Report is available from the C.D. Howe Institute.

The Task Force put forward recommendations for both near-term and longer-term adjustments that could be made, as follows:

Near-term adjustments

• OSFI should apply a look-through treatment to life insurer investments in private credit funds, calculating capital requirements on the basis of the risk of the underlying assets rather than treating the investment as an equity exposure, while recognizing that credit risk is managed by the fund rather than the insurer in such cases.
• OSFI should dedicate resources to expediting the review and approval of internal bank model changes for SME lending. Without faster approvals, reductions in SME risk weights will not reach borrowers in practice.
• As the overly inclusive definition of commercial loan and the 5% ceiling on commercial lending allocations under the Insurance Companies Act are removed, OSFI should seize the opportunity to calibrate expectations to the size, expertise, and risk management capacity of individual institutions, ensuring that the removal of the statutory limit translates into a genuinely more risk-based supervisory approach. It should also ensure that smaller insurers have access to relief mechanisms equivalent to those available to larger life insurers.
• OSFI should continue fast-tracking the continuance of credit unions federally and the incorporation of deposit-taking institutions by fintechs. Provincial authorities should facilitate the migration of larger credit unions to the federal framework to support competition and permit greater geographic risk diversification.
• OSFI should tailor capital rules for federal credit unions, including by reconsidering NVCC conversion features that do not work for cooperative structures, and by considering whether Tier 2 subordinated debt could replace Additional Tier 1 capital requirements for smaller institutions, as in Australia.
• More broadly, OSFI should strengthen its partnership-oriented supervisory model by improving turnaround times and transparency. Changes to how OSFI applies requirements in practice may offer as much or possibly even more scope to facilitate credit extension as changes to the public requirements themselves.

Longer-term adjustments

• OSFI should evaluate whether standardized SME risk weights, largely drawn verbatim from the Basel framework, are properly calibrated for Canadian conditions. The Basel framework is designed for internationally active banks; its risk weights reflect international experience that may not be representative of loss experience in the Canadian market. OSFI should consider whether a different calibration is warranted for domestic institutions that operate exclusively in Canada. Continuing to simplify regulatory requirements for smaller deposit-taking institutions would also make them more competitive in serving SME borrowers.
• Unless there is a clear prudential rationale, OSFI should reexamine the capital treatment of credit exposures for life insurers under the Life Insurance Capital Adequacy Test (LICAT), particularly where the current framework produces materially different capital charges for equivalent underlying risks. A principles-based review of specific asset classes, starting with private credit and unrated infrastructure, could identify areas of undue conservatism.
• Over time, OSFI should consider allowing insurance companies to use their own risk models to compute their capital requirements, subject to OSFI review and approval, aligning the insurance framework more closely with that used for banks.
• OSFI should examine whether the 400% risk weight for speculative unlisted equity exposures reflects actual risk or whether there is undue conservatism in how certain exposures are classified. Addressing this could expand banks’ ability to support Canadian growth companies.

A full copy of the Report is available from the C.D. Howe Institute.