Prudential Requirements and Business Lending in Canada: Issues, Questions, and Near-Term Priorities

On February 9, 2026, the C.D. Howe Institute’s Task Force on Office of the Superintendent of Financial Institutions (OSFI) Prudential Requirements and Business Lending held its inaugural meeting.

The Institute established this short-term task force in response to a number of OSFI statements issued in the fall of 2025. The theme of the statements centred on finding ways to increase credit to Canadian businesses to strengthen the economy amid global challenges, including the trade war with the United States. The task force’s goal is to provide commentary and recommendations on proposed changes, such as revisions to the capital requirements for banks and insurance companies, and to explore new ideas that may warrant consideration.

The Task Force consists of seven experts in the field: Riaz Ahmed, Jamey Hubbs, Timothy Lane, Peter Levitt, Katie Taylor, Mark Zelmer, and Jeremy Kronick, who is Chair. Riaz Ahmed, Peter Levitt, Katie Taylor, Mark Zelmer, and Jeremy Kronick attended this meeting. Timothy Lane provided written comments.

Members began with a wide-ranging discussion of how banks and insurance companies provide credit to the economy:

• Extending various types of loans to companies and purchasing corporate securities or other investment vehicles that channel credit to Canadian companies.
• Underwriting new debt issues that flow funds to Canadian firms.
• Life insurers investing in a range of debt instruments, including corporate debt obligations, in order to match these assets against their liabilities, including segregated funds and life insurance policies.
• Banks and life insurers also have third-party asset manager affiliates that acquire corporate debt obligations for their sponsored investment funds and other investment vehicles.

The conversation then shifted to framing the issues and questions that could guide specific recommendations. While focusing on the possible scope to adjust regulation to address gaps in credit allocation to Canadian businesses, the group recognized that regulation is only one among several factors that may account for such deficiencies. With that caveat, they discussed several main questions:

• Where do credit gaps exist, and what prevents lenders from supplying more credit on cost-effective terms for borrowers while remaining profitable for lenders?
• Which Canadian-specific capital-related requirements exceed international minimum standards?
• Do any unique features in Canadian prudential regulatory requirements discourage banks and insurers from putting more capital into use in the Canadian economy?
• Can regulators relax any of those prudential requirements without undermining public confidence in financial institutions’ resilience during major stresses?
• Should the largest life insurers, like the major banks, be able to calculate their own capital requirements using their own risk models?
• Institutions carry capital to protect themselves and their creditors (including depositors, policyholders, and other creditors) from any unexpected losses, which begs the question: do banks and insurance companies hold more capital than is needed to cover such losses, especially given higher provision requirements for expected losses?

Members were encouraged by OSFI’s stated desire to move quickly to remove distortions in credit allocation. They suggested that OSFI’s rule-making process could be sped up by ensuring it deploys the right expert resources to priority areas. Here, members felt it was important to distinguish between how prudential requirements are set and how they are applied in practice by OSFI supervisors. Although the task force focused on the former, members noted that more nimble thinking and action on the latter could also improve the productive use of OSFI and financial institution resources. Members were clear that the supervisory role is critical, but any opportunity to streamline it and reduce its burden, especially in the environment we are in, could be beneficial.

Members mentioned that factoring into a financial institution’s decision on whether to lend and invest is the impact capital requirements have on their own returns on equity (ROE). The more onerous the prudential requirements, the greater the challenge that financial institutions face in deploying their surplus capital while meeting the ROE targets that their shareholders expect. That dynamic may ultimately reduce the number of lending or investment opportunities institutions are willing to undertake. The group felt that this is a critical issue for any changes OSFI is considering.

Returning to the question of what problem we are trying to solve, members argued for a clearer definition of who needs the financing. Who is currently underserved? If it’s the venture capital community, banks and insurance companies are unlikely to solve this issue, as their business models are not well-suited to supporting this form of finance. Similarly, members argued that large companies are not short of credit and investment. Evidence often shows that middle and smaller enterprises face the greatest gaps.¹1 Kronick, Jeremy M. 2023. “Five Policies to Scale our SMEs.” Intelligence Memo. Toronto: C.D. Howe Institute. March 20. https://cdhowe.org/publication/five-policies-scale-our-smes/. Members stressed grounding recommendations in economic evidence about which parts of the Canadian economy are genuinely starved for debt or equity investments and creating conditions that align financial institutions’ risk appetites with regulatory and market expectations. Without this analysis, there is a risk of prescribing solutions without fully understanding the underlying problem.

This inaugural session focused on establishing the right framing and questions to support useful recommendations. The Task Force will develop solutions in greater detail at its next meeting, but there were some recommendations that members felt could be dealt with fairly easily.

First, the group discussed the significant risk transfer (SRT) market, through which banks reduce risks and capital requirements by selling credit exposure to third parties. OSFI has approved these structures and the related changes in capital requirements. But members argued that the existence of these complex SRT structures that exploit regulatory capital arbitrage opportunities is suggestive of the capital requirements being too high in the first place. Mapping the full scope of SRT activity across bank portfolios would help determine whether recalibrating capital requirements would be a more effective approach.

Second, members examined OSFI’s treatment of limited partnership (LP) interests in private credit funds as equity exposures. Multiple participants highlighted that the private credit market has expanded dramatically in the past decade, and that insurers are eager to invest in these instruments, many of which are investment-grade credit, not equity. However, OSFI’s rules treat all LP private fund investments as equity exposures, forcing institutions to create structured products to work around the regulatory treatment. The group would encourage OSFI to look through the legal structure of investment vehicles that federally regulated financial institutions invest in and calculate capital requirements on the basis of the risk of the vehicle’s underlying assets. Members argued that OSFI could address this issue within months and should prioritize it.

As mentioned in the list of questions, members observed that large life insurers are sophisticated institutions but lack the same latitude as banks to use their own risk models for capital calculations. They suggested that allowing those insurers greater flexibility to calculate their own capital requirements – even short of full internal model approval – might help unlock meaningful capacity for business funding.

The Task Force will meet again in March to further develop recommendations to increase credit and investment in the Canadian economy in a way that facilitates economic growth while maintaining a robust framework for prudential regulation.

Members of the C.D. Howe Institute Task Force on OSFI Prudential Requirements and Business Lending

Members of the Council participate in their personal capacities, and the views expressed do not represent those of any institution or client.

Chair:

• Jeremy Kronick, Vice-President, Economic Analysis and Strategy, C.D. Howe Institute

Members:

• Riaz Ahmed, Former President and CEO, TD Securities
• Jamey Hubbs, Senior Fellow, C.D. Howe Institute, Former Vice Superintendent, OSFI
• Timothy Lane, Senior Fellow, C.D. Howe Institute, Former Deputy Governor of the Bank of Canada
• Peter Levitt, Co-Chair Financial Services Research Initiative, C.D. Howe Institute, Corporate and Philanthropic Director, Former EVP, Treasury and Taxation, CIBC
• Kathleen Taylor, Co-Chair Human Capital Policy Council, C.D. Howe Institute, Chair, Altas Partners, Element Fleet, and the Hospital for Sick Children, Former Chair of RBC
• Mark Zelmer, Fellow-in-Residence, C.D. Howe Institute, Former Deputy Superintendent of Financial Institutions, OSFI

Prudential Requirements and Business Lending in Canada:
Issues, Questions, and Near-Term Priorities