Canadian banks can temporarily exceed a 5.5% cap on issuance after OSFI let them issue an amount such that up to 10% of their assets are pledged for covered bonds as long as the extra issuance is used for newly available Bank of Canada repo, and RBC printed C$20bn on Friday.

The move was part of a package of actions announced by the Office of the Superintendent of Financial Institutions (OSFI) on Friday to address what it deemed operational issues stemming from Covid-19.

“The regulatory changes we are announcing today will ensure that our capital and liquidity requirements are fit for purpose in today’s extraordinary conditions,” said Superintendent Jeremy Rudin (pictured). “We are also acting to alleviate some of the pressure on federally regulated banks, insurers and private pension plans so that they can focus their efforts on the most critical operational areas during the current disruption.”

Among its parallel crisis measures, the Bank of Canada on 18 March announced that it would for the first time accept own-name covered bonds in Canadian dollars as collateral for its term repo operations.

Toronto-Dominion Bank took advantage of this when it issued a record C$10bn ($7.14bn, €6.42bn) of covered bonds on 20 March, with some of its compatriots following with similar but smaller issues.

According to Maureen Schuller, head of financials research at ING, Canadian banks had by Thursday issued C$21bn (€14bn) in retained covered bonds, with overall year-to-date issuance including public deals of €25bn-equivalent in the first quarter exceeding full-year 2019 supply.

OSFI on Friday gave them additional headroom to do so in raising the cap from 5.5% to 10%, noting that assets relating to market instruments must remain limited to 5.5% of total assets.

“Institutions which exceed the 5.5% limit will be expected to return below this threshold as soon as market funding conditions permit,” said the regulator, “and provide a plan to OSFI outlining their proposed approach and timing to return below the required threshold.”

Royal Bank of Canada, having issued a C$2.5bn April 2021 floating rate note on Tuesday, printed a further C$20bn in four C$5bn tranches on Friday, FRNs with maturities ranging from 18 months to three years.

Canadian banks had been the most active issuers of benchmark covered bonds since financial markets were afflicted by the coronavirus pandemic, tapping a variety of currencies in size at pricing levels that have surprised some market participants. However, a market participant noted that the supply had slowed significantly as the Canadian support measures were put in place.

OSFI is offering the relief for a year, although it said it could extend the temporary measures beyond this.

The Bank of Canada’s repo move is also temporary – although a Canadian banking industry source said he hoped that option will remain.

“This is something we have been advocating for a long time and it’s good to see it at least at some point,” he said. “It’s hard to say if it opens the door to it remaining.

“What BoC could do is keep the eligibility, but then adjust the parameters – such as haircuts and pricing – to encourage banks to use it more or less, while removing the uncertainty over whether or not it is going to be there when needed.”

The Canadian banking industry has been lobbying for an overall increase to what was previously a 4% cap on covered bond issuance versus total assets, with the limit being one of the strictest of any jurisdiction.

OSFI revised the way the limit is calculated in May 2019, with the main change being that instead of covered bond issuance being capped at 4% of total assets, total assets pledged for covered bonds is limited to 5.5% of total assets. Although the regulator said that the change was not intended to increase issuance capacity, many market participants said that it would have that effect, even if overcollateralisation levels would limit the extent of any increase.