Canadian regulator proposes lower risk weights for construction loans with strong presales
The Office of the Superintendent of Financial Institutions has launched a 90-day public consultation on draft revisions to the Capital Adequacy Requirements Guideline.
The proposed revisions build on the latest version of the guideline published in September 2025. Comments received will inform final changes to the guideline, which is expected to come into effect on November 1, 2026 or January 1, 2027 for institutions with a fiscal year ending October 31 or December 31, respectively.
The revisions are aimed at enhancing the clarity of capital rules, improving the consistency of their application, and ensuring that capital requirements continue to be aligned with the underlying risk faced by institutions. OSFI has also made targeted updates to monitoring and approval requirements in the market risk framework, thereby reducing regulatory burden.
OSFI has made several changes to the capital treatment of Land Acquisition, Development, and Construction exposures under the credit risk Standardized Approach to increase the granularity and risk sensitivity of the capital treatment. Institutions can consider ADC projects with loan-to-values lower than 80 percent as substantially complete and apply the income producing commercial real estate treatment, provided a certificate of occupancy has been issued. A preferential risk weight of 110 percent applies to commercial ADC loans with 50 percent pre-sales or pre-leases, up to a loan-to-value of 70 percent. The base risk weight for low-rise residential real estate has been lowered from 150 percent to 130 percent. A 90 percent risk weight applies to residential ADC, both high and low-rise, where the level of pre-sales is equal to or greater than 75 percent.
OSFI has lowered the risk weight applied to Corporate Small and Medium Size Enterprise exposures under the credit risk Standardized Approach to 75 percent from 85 percent, regardless of whether they meet the criteria for regulatory retail. The risk weight under the credit risk Standardized Approach for unrated exposures to Corporates that qualify as investment grade has been lowered from 150 percent to 135 percent.
The risk weight for exposures to Canadian Systemically Important Banks under the credit risk Standardized Approach has been reduced from 20 percent to 15 percent. These lower risk weights also apply to covered bonds issued by Canadian SIBs.
OSFI has revised the formula under the Internal Ratings-based approach for the Downturn Loss Given Default floor add-on to the institution's long-run LGD estimate for exposures secured by residential real estate by removing the Supplementary Capital Requirement Indicators calculation for the 11 metropolitan areas mentioned in Appendix 5-3 of chapter 5 of the CAR Guideline, and modifying the add-on formula such that it no longer peaks at an 80 percent current LTV but continues to increase above an 80 percent current LTV.
For certain exposures that receive a 1250 percent risk weight, specifically certain securitization exposures, equity investment in funds, and first-to-default credit derivatives, OSFI has modified the guideline to allow institutions the option to deduct the exposure from Common Equity Tier 1 instead of applying a 1250 percent risk weight.
Originating institutions will be required to notify OSFI of all synthetic securitization transactions within 30 days of the transaction being executed. Originating institutions will also be required to submit certain specified information along with their notification. OSFI has specified that an institution will have to revert any capital benefits accrued by treating a transaction as a securitization exposure, should OSFI determine at any point that the securitization exposure does not qualify for treatment under the securitization framework.
OSFI has capped risk weights applied on short credit positions, such that the risk weight will be the lower of the prescribed risk weight and the marked bond spread. OSFI will allow institutions the option of assigning the same maturity to the cash equity position as the maturity of the derivative contract it hedges, and any unmatched cash equity positions must be assigned a maturity of 12 months. Alternatively, institutions will have the option of continuing to apply the current method.
OSFI is accepting stakeholder comments until February 18, 2026, with the final guideline and a summary of feedback expected in September 2026.
