Canada’s smaller banks and alternative lenders may be more pressured by proposed OSFI rules on liquidity than larger lenders according to Fitch.
The ratings firm says that because these lenders are more reliant on brokered deposit funding, their profitability and competitiveness may be affected more than larger lenders.
Fitch says that even those smaller/alternative lenders that have elevated levels of liquidity, such as Tangerine and Simplii, the new rules could limit long-term loan asset growth under their current deposit raising strategies.
The firm’s analysis matches that of Moody’s and other commentators who say that larger lenders have more room to adjust mortgage rates and other positions to boost competitiveness.
The OSFI proposal, which aims to shore up the liquidity of less-stable deposits, would increase the estimated runoff rates, or the percentage of retail deposits vulnerable to withdrawal under a stress scenario.
The regulator has been acting to firm-up the ability of financial institutions to cope with potential financial crises following Home Capital’s liquidity issues in 2017.
Under the proposal, banks would be required to hold liquid assets of up to 40% of high interest savings accounts or deposits sourced from third parties, depending on particular characteristics. Currently, runoff rates for all categories of deposits range between 3% and 10%.
In a hypothetical case where a bank held the minimum liquidity coverage, and where estimated runoff rates of deposits rose up to 40% from 10%, the new rule would require the bank to increase its high-quality liquid assets as a percentage of total assets, reducing interest earning assets by an equal amount. All else equal, net interest income would fall in proportion to the re-allocation of earning assets to non-earning, high-quality liquid assets (HQLAs).
OSFI’s consultation period for comments runs through March.
