Maklem: Easing capital rules alone will not push banks to increase lending

Bank of Canada Governor, Tiff Macklem, said that easing capital requirements on major banks in Canada may provide additional flexibility to the banking sector, but it will not be sufficient on its own to stimulate lending or drive economic activity.

Macklem explained that lowering the requirements "will not hurt," but he emphasized that making banks more capable of lending alone does not address the weakness of commercial investment in the country.

He added that increasing economic activity first requires companies with clear projects, ready to take risks and invest, and then financing comes afterward.

Macklem's remarks came after the Office of the Superintendent of Financial Institutions decided to reduce the domestic stability buffer for major banks by 50 basis points to 3%, a capital reserve required for banks to hold to face financial pressures.

Under the change, the largest Canadian banks are now required to maintain a minimum of 11% of common equity tier 1 capital compared to risk-weighted assets, a ratio that is still lower than the levels banks actually hold.

Analysts believe the decision gives banks additional room for lending, but it does not necessarily mean an immediate increase in loans, especially amid weak commercial demand and companies' hesitation to launch new projects due to economic uncertainty.

They also pointed out that the current problem is not only in the banks' ability to finance, but in the lack of strong demand for borrowing, whether from companies or from the housing market, which is experiencing a slowdown.

The regulatory change aims to support financing sectors that the government considers important for economic growth, such as infrastructure, defense, and artificial intelligence.

However, Macklem confirmed that moving investment requires more than adjusting banking rules; there must be feasible projects and sufficient confidence among companies to proceed with deferred investment decisions.

The Bank of Canada's stance reflects caution about overstating the impact of the decision, as increasing banks' capacity to lend does not automatically translate into economic growth unless there is a real appetite from the private sector to borrow and invest.