February updates to financial services regulation have emphasized economic readiness and fintech innovation.
The Office of the Superintendent of Financial Institutions (OSFI) issued its quarterly release of regulatory changes on February 20, 2025, covering a review of bank capital requirements and releasing its rules for federally regulated financial institutions (FRFIs) to manage their exposure to crypto-assets. Earlier this month, OSFI paused increases to banks’ capital levels.
Payments Canada launched a consultation earlier this month, related to expanding membership for its payment systems to include fintechs, paytechs and other regulated payment service providers.
Anticipatory Strategy: Supporting Financial Stability Ahead of Possible Tariffs
In advance of and with its quarterly release, OSFI has responded quickly to current events, including the threat of tariffs from the new federal administration in the United States.
Deferred Capital Floor Increases
On February 12, 2025, OSFI issued a statement advising that it would defer changes designed to align with the Basel III standardized capital floor level.
The Basel III reforms aim to address identified shortcomings in the use of internal models to calculate minimum capital requirements, to bolster financial stability. Risk-weighted assets generated by Canadian banks’ internal ratings-based capital models cannot fall below 67.5% of risk-weighted assets computed under the standardized approach. The floor was supposed to rise to 72.5% in 2027, after a one-year deferral in 2024. Canada has been one of the Basel III reforms implementation leaders.
OSFI noted in its statement that “there remains uncertainty about when other jurisdictions will fully implement Basel III” and “implementation across…jurisdictions” is necessary “so that competitive balance prevails throughout the international banking system.” The delay follows a similar announcement made by the UK Prudential Regulation Authority on January 17, which attributed its latest deferral to the current uncertainty around the timeline for implementation of the Basel III reforms in the United States.
In addition to supporting Canadian banks’ global competitiveness in uncertain markets, the pause may also increase the banks’ resilience in the face of any economic downturn triggered by the threat or implementation of US tariffs.
Evolving Capital Requirements
As part of its quarterly release, OSFI has launched a public consultation on the Capital Adequacy Requirements (CAR) Guideline for banks. Some of the proposed changes highlighted by OSFI include:
- Clarifying existing capital rules and supporting a more consistent application under the credit risk Standardized Approach (SA) and Internal Ratings-based (IRB) approaches, including ensuring the treatment of Combined Loan Products is consistent with their risks and structure;
- Updating how OSFI defines income-producing residential real estate exposures, specifically where repayment is materially dependent on cash flows generated by the property;
- Clarifying that the credit valuation adjustment (CVA) framework applies to all institutions with transactions in scope for the CVA capital charge, including small and medium-sized banks and so requiring corresponding changes to OSFI’s Small and Medium Sized Deposit-Taking Institutions Guideline;
- Clarifying the treatment of certain U.S. government-sponsored entities, including those under conservatorship or receivership, will be subject to OSFI’s risk weighting under the Standardized Approach and its parameter capital floors, to “align their capital treatment with their treatment under US capital rules”; and
- Modifying the default risk charge for sovereign exposures under the market risk Standardized Approach, so it aligns more closely with the Basel Framework.
The proposed revisions build on the latest version of the CAR Guideline which was published in October 2023. The review of the CAR Guideline has been projected by OSFI for several months, although it now coincides with the expected dilution of banking regulations in the United States.
Focus on Fintech
As fintech becomes subject to further regulation around the world, the sector finds itself with both new obligations and new opportunities.
Final Crypto-Asset Exposure & Disclosure Guidelines
OSFI has issued two final guidelines to outline its approach to the capital and liquidity treatments of crypto-asset exposures, following public consultation in 2023. The Capital and Liquidity Treatment of Crypto-asset Exposures (Banking) Guideline applies to banks, federal credit unions, bank holding companies, foreign bank branches, and federally regulated trust and loan companies. The Capital Treatment of Crypto-asset Exposures (Insurance) Guideline applies to all federally regulated life insurers and property and casualty insurers, including Canadian branches of foreign companies, fraternal benefit societies, regulated life insurance holding companies and non-operating life insurance companies.
Crypto-assets are generally digital assets that depend primarily on cryptography and distributed ledger or similar technology, including cryptocurrencies, stablecoins and non-fungible-tokens (NFTs). The banks will have to consider crypto-assets that are directly on their balance sheets, as well as exposures among their customers.
The new Guidelines are intended to work in conjunction with OSFI’s existing guidelines relating to capital and liquidity. With variations for banking or insurance, the Guidelines provide frameworks for: (1) the categorization of crypto-assets; (2) risk and accounting classification (banking vs. trade books); (3) related capital requirements (credit risk, market risk, counterparty risk); (4) corresponding liquidity risk; and (5) unique risk management considerations.
Taking consultation feedback into account, the Guidelines also include a simplified approach for institutions with limited crypto-asset exposures or those wishing to streamline or bypass classification determination. Banks with limited exposure can deduct all crypto-asset exposures from their common equity tier 1 (CET1) capital.
A balanced approach to the risks and innovation tied to crypto-assets has been a common challenge for all regulators. OSFI was involved in the development of the recently published international Basel Committee on Banking Supervision (BCBS) standards for crypto-asset exposures, which are referenced in the new Guidelines.
Relatedly, OSFI has also issued final guidelines for banks concerning public disclosure of their exposures to crypto-assets, detailed in the Pillar 3 Disclosure Guideline for Domestic Systemically Important Banks (D-SIBs) and the Pillar 3 Disclosure Guideline for Small and Medium-Sized Deposit-Taking Institutions (SMSBs).
Payments Canada Membership Consultation
On February 4, 2025, Payments Canada launched a 30-day public consultation on policy proposals to align with upcoming amendments to the Canadian Payments Act (CP Act).
The CP Act amendments, awaiting coming into force on a day set by the Governor in Council, will expand Payments Canada membership eligibility to include (1) payment service providers as defined in the Retail Payment Activities Act (RPAA) that perform retail payment activities, (2) credit union locals that are members of a central, and (3) clearing houses of designated clearing and settlement systems. Notably, there appear to be no current plans to open membership in Payments Canada to cryptocurrency services, as explained by the Bank of Canada.
Expanding Payments Canada’s membership eligibility could lead to greater innovation and competition in payments services, particularly with the addition of fintechs, paytechs and other payment service providers regulated under the RPAA. Feedback will likely be critical for Payments Canada and the Bank of Canada to assess key risks, the related requirements for direct clearers to maintain a Bank settlement account, as well as the implications for the technical and operational requirements of the different payment systems.
In February, Payments Canada also announced a series of additional updates to the rules for the Automated Clearing and Settlement System (ACSS) and Lynx. These changes focus on enhancing operational processes and alignment with existing by-laws. The amendments took effect on February 10, 2025.
Other Updates: Climate Risk Relief
OSFI has also provided FRFIs with additional time to undertake some climate risk reporting. With its quarterly release, OSFI announced that the implementation date to disclose Scope 3 greenhouse gas emissions would be extended to fiscal year 2028, and disclosure timing for off-balance sheet assets’ Scope 3 greenhouse gas emissions would be extended to fiscal year 2029.
OSFI advised that the extensions are to reflect updates to the Canadian Sustainability Standards Board standards, released on December 18, 2024.
Looking Forward
The following next steps are anticipated regarding the above updates:
- OSFI will hold an Industry Day on March 6, 2025, to give stakeholders further insight on the Quarterly Release items and the opportunity to ask related questions. Interested stakeholders are asked by OSFI to register in advance.
- OSFI committed to notifying affected banks at least two years prior to resuming any increase in capital floor requirements.
- Comments on the proposed changes to the CAR Guidelines must be submitted to OSFI by April 22, 2025. OSFI has indicated the final changes to the Guideline will likely come into effect in Q1 2026.
- The new Crypto-Asset Exposures Guidelines will be effective as of November 2025 or January 2026, for FRFIs with a fiscal year end of October 31 or December 31, respectively. OSFI confirmed its interim Advisory on the regulatory treatment of crypto-asset exposures would continue to apply until then. The Disclosure Guideline changes will be effective for the fiscal Q1 2026 reporting period.
- The Payments Canada consultation is open from February 4 to March 6. The Department of Finance has not provided any date for Payments Canada membership changes. Since the Bank of Canada’s oversight of payment service providers under the RPAA will not come into force fully until September 2025, the changes will likely not be implemented before then.
- Updates to the disclosure expectations in Guideline B-15: Climate Risk Management are expected to be released by OSFI in late March 2025.
