The Office of the Superintendent of Financial Institutions (OSFI) is considering how a 4% cap on covered bond issuance relative to total assets that it imposes on Canadian issuers should evolve and will this year launch a related consultation, after having reviewed bank encumbrance practices.

Canada has one of the strictest covered bond regimes in terms of permitted issuance, with OSFI limiting covered bond issuance to no more than 4% of the total assets of deposit-taking institutions. Canadian issuers have lobbied for a raising of the cap, towards 8% or 10%.

OSFI deputy superintendent Mark Zelmer (pictured) signalled yesterday (Tuesday) that the regulator will address the issue this year.

“Last year we began reviewing bank encumbrance practices to help guide our thinking on how the covered bond limit should evolve going forward,” he said. “Underpinning this work is a desire to encourage banks to maintain enough unencumbered high quality assets when times are good so that banks can meet higher collateral requirements and obtain secured funding when needed during a period of stress.

“This would help to prolong the viability of a bank in times of stress, while addressing the need for unencumbered assets to repay unsecured creditors in the event a bank needed to be resolved. More details on our thinking will emerge later this year when OSFI begins a consultation process.”

The OSFI deputy superintendent’s remarks came in part of a speech referring to projects “designed to promote the viability of banks in times of stress”.

Zelmer also highlighted plans announced by OSFI in December to tighten the regulatory capital framework for residential mortgage lending to reflect property price and affordability developments. OSFI is consulting on that update this year and expects to have final rules in place no later than next year.