Macklem: Lower Capital Requirements Won't Create Borrowers
The Bank of Canada's overnight rate sits at a level that makes a business loan for warehouse expansion look unattractive, and a variable-rate mortgage renewal unaffordable. That problem, according to Governor Tiff Macklem, will not be solved by giving banks more room to lend.
OSFI, the federal regulator that sets capital buffer requirements for Canada's Big Six banks, can adjust the amount of common equity those institutions must hold against their loan books. Lowering that requirement increases what analysts call "lending capacity", the theoretical headroom a bank has to issue more credit. In practice, Macklem argues, that headroom sits unused if the cost of borrowing exceeds what businesses or households are willing to pay.
The supply side is not the constraint
Capital rules dictate how much equity a bank must hold relative to its risk-weighted assets. A lower requirement means the same dollar of equity can support a larger loan portfolio. The appeal of easing those rules during a slowdown is straightforward: banks gain capacity, credit flows, the economy gets a jolt.
The reality is messier. RBC, TD, and Scotiabank already maintain Common Equity Tier 1 ratios well above OSFI's minimum, often by 150 to 200 basis points. They do this to satisfy rating agencies, reassure shareholders, and preserve dividends during stress. When OSFI lowers the floor, these institutions rarely sprint to deploy the freed-up capital. They sit on it.
Even if a bank wanted to deploy it, the question is: deploy it where? A 47-year-old contractor in Oakville who locked in a mortgage at 1.79% in 2021 is not refinancing at 5.2% to fund a kitchen renovation. A mid-market manufacturer in Winnipeg is not borrowing at prime plus 250 basis points to expand capacity when demand is soft and the payback period uncertain. The borrowers are not at the door because the price of the loan does not make sense relative to the return.
What moves the needle
Macklem's point is not that capital rules are irrelevant. They matter enormously during a crisis, when a lower buffer can prevent a credit freeze. In 2020, OSFI cut the Domestic Stability Buffer from 2.25% to 1%, and that move helped stabilize the system when banks were facing a wall of expected defaults that never fully materialized.
But in 2026, the problem is not that banks lack the ability to lend. The problem is that the spread between what it costs to borrow and what borrowers expect to earn from that capital is too wide. Fixing that spread requires either lower interest rates or higher expected returns from investment. Capital rules do neither.
There is a secondary risk that Macklem did not name directly but that market analysts have flagged: if OSFI lowers requirements visibly, the market may interpret the move as a distress signal. Consumers might read it as confirmation that the economy is weaker than reported, prompting them to save more and spend less. The intended loosening becomes a tightening in sentiment.
Where the capital goes instead
When banks do gain regulatory relief, the excess often flows to shareholders, not borrowers. Share buybacks and dividend hikes are the path of least resistance. A bank that increases its dividend yield from 4.1% to 4.4% satisfies investors without taking on the risk of a marginal commercial loan to a sector that might be overvalued.
This is rational for the bank. It is not useful for aggregate demand. Macklem's broader point is that monetary policy, the overnight rate and its transmission through the yield curve, remains the primary lever for influencing borrowing appetite. Capital rules can support the system's stability. They cannot create demand for credit when the price of that credit is the problem.
