Regulatory relief for Canadian financial institutions increases firms’ risks but bolsters the economy and eases banks’ credit risks in the short term, says Moody’s Investors Service in a new report.
Last week, federal financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), announced a series of temporary measures that curb regulatory demands on banks and insurers.
The relief includes relaxing capital and liquidity requirements, treating loans with payment deferrals favourably, delaying the implementation of changes to capital rules, extending filing deadlines, and suspending policy consultations.
Moody’s said that the measures “will increase risks to financial institutions by shrinking existing capital and liquidity buffers” and reducing the likelihood of early regulatory intervention.
“However, the aid program can support the broader economy and reduce credit risks at financial institutions by stimulating aggregate demand and employment through loan guarantees and direct funding to borrowers, by purchasing high-quality assets that are trading below their intrinsic value, and by offering funding to banks on favourable terms,” it said.
Among other things, Moody’s noted that OSFI will treat loans that are granted payment deferrals as still-performing loans, so banks won’t be required to hold extra capital buffers for them.
“Payment holidays could weaken asset quality,” Moody’s said, noting that this could hide problem loans that won’t recover, even when the economy does.
At the same time, these measures will support the value of underlying loan collateral, it said.
“The negative effects of these programs are likely to be significantly offset by positive macroeconomic effects resulting from a boost to consumer confidence and spending,” it noted.
OSFI also increased banks’ covered bond limits, which gives banks greater financing capacity, Moody’s said.
“With these measures, the Canadian government aims to reduce financial market stress and ease funding constraints,” it said. “They are designed to recalibrate regulations to align with the national government’s fiscal and monetary crisis-response efforts announced in recent weeks.”