The Office of the Superintendent of Financial Institutions (OSFI) revised its covered bond limit calculation last week, with some analysts forecasting that the changes could lead to a sharp increase in issuance capacity even if the regulator said the impact would be neutral.

Most notable in the changes, the numerator has been changed from covered bonds outstanding to “total assets pledged for covered bonds”, and the limit changed from 4% of total assets to 5.5%. (The denominator measure of total assets was also updated.)

On Thursday of last week (23 May), OSFI said the update to the numerator was taken “to better reflect the amount of assets encumbered through covered bonds by capturing the overcollateralisation associated with these instruments”.

It also noted that the covered bond limit must continue to be met on an ongoing basis, and said: “The intent of these updates is to neither increase nor decrease the covered bond issuance capacity for DTIs.”

OSFI’s move comes a year after Superintendent Jeremy Rudin in April 2018 raised hopes that the 4% limit – which is among the lowest such limits globally – might be increased when he said OSFI was taking “a hard look” at the limit.

Interpretation of the regulator’s latest move have differed sharply.

DZ Bank analysts, for example, viewed the change as disappointing for Canadian issuers. They highlighted that the increase in the headline percentage was small, at just 1.5%, and further that the calculation method has become “more conservative”.

“The limit was increased from 4.0% to 5.5% only against the background of the overcollateralisation to be taken into account in future,” said DZ’s analysts. “In this respect, it looks to us as if the issuers’ hopes for a significantly higher covered bond issuance limit has been shattered for the time being.”

However, some analysts concluded that OSFI’s changes will result in a sizeable increase in issuance capacity.

LBBW analysts, for example, said that the regulator had delivered “long-awaited growth momentum”, with the 5.5% headline percentage “only slightly below” a forecast of 6.0% they had made a year previously. They calculated that the change creates scope for an additional EUR85bn of issuance – equivalent to more than half of the EUR157bn of Canadian covered bonds currently outstanding.

The analysts who forecast substantial increases in issuance capacity mainly did so on the basis of current overcollateralisation levels.

But according to NordLB analysts, OSFI informed them that its expectation that the changes will have a neutral impact on issuance is based partly on the assumption that OC requirements will increase with issuance volume, with the numerator rising disproportionately. So despite calculating a headline C$65bn increase in issuance capacity, they added: “In consideration of the OSFI’s remarks at least, this figure can in our view only be regarded as a starting value or maximum limit, though the stipulation of neutrality should in purely mathematical terms trigger a very sharp rise in the OC requirements

Analysts’ views on the likelihood of OSFI’s move making covered bonds a more viable option for smaller Canadian issuers also varied according to their interpretations of the changes. Among those mentioned in this respect were Laurentian Bank of Canada, Canadian Western Bank, Equitable Bank and Home Trust Company.