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Streetwise Canada’s banking regulator relaxes new deposit rules amid industry outcry

Canada’s banking regulator has softened a proposal to create stricter rules governing banks’ deposits, dropping a contentious provision aimed at online banking that had drawn criticism from the industry.

A confidential draft that the Office of the Superintendent of Financial Institutions (OSFI) circulated among banks late last year detailed plans to keep banks more stable in times of stress by compelling them to hold more liquid assets. But as The Globe and Mail reported, banks voiced concerns that the draft rules would reduce competition by disproportionately handcuffing smaller and mid-sized lenders, and broadly penalizing online deposits at a time when daily banking is increasingly done digitally.

A new draft proposal that OSFI released for public consultation on Friday removes any reference to internet-sourced deposits. It also creates a sliding scale to assess deposits from third-party brokers, based on a range of characteristics that typically signal a depositor may be less loyal. The proposal still suggests tougher treatment for deposits from clients with no other ties to a bank, or which use high interest rates to lure depositors. But some banks are breathing a sigh of relief as the new rules appear more nuanced and less onerous.

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"This is unambiguously good news for us,” said Andrew Moor, chief executive officer of Equitable Group Inc.

One thing hasn’t changed: The new rules still target banks and mortgage lenders that attract large volumes of deposits from unaffiliated brokers. OSFI’s stance is informed by memories of liquidity crises such as the financial meltdown of 2008, and a run on Home Capital Group Inc.’s deposits in 2017. As a result, the regulator is seeking to bolster the cash buffer banks hold by tightening requirements on riskier deposits.

“Based on feedback received, the proposed revisions in the public consultation no longer focus on … how the deposit gets to the institution,” an OSFI spokesperson said in a statement. “Rather they focus on certain characteristics evident in some deposit product offerings.”

Those characteristics include whether the depositor has an established relationship with the bank, their relative sophistication, and whether a bank advertises a high interest rate as a deposit product’s main selling point. But Mr. Moor worries that could discourage banks from clearly disclosing interest rates.

“To have public policy that encourages people to hide the interest rate on a deposit doesn’t seem very sensible to me," he said. “We can see why [OSFI] wouldn’t want to encourage money to flow too fast around the system. But it’s very important that banks compete on rate. That’s what many savers rely on.”

The regulator sets “run-off rates” to estimate the flow withdrawals for each type of deposits in times of stress, labelling them as more or less stable. Those rates are key to calculating the amount of liquid assets banks must keep on hand, which determines how much cash is available to make loans that drive profit, margins and return on equity.

In private, OSFI initially proposed to raise the run-off rate for brokered deposits from third parties from 10 per cent to either 20 or 40 per cent. But the Canadian Bankers Association warned that OSFI was applying “an excessively blunt instrument when assessing the riskiness of those deposits," in a confidential letter obtained by The Globe.

The new draft proposal outlines six types of less stable deposits with run-off rates ranging from 10 to 40 per cent, adding more fine-grained categories carrying rates of 15, 25 and 30 per cent. The regulator has also scrapped a previous plan to apply a 20-per-cent run-off rate to internet-sourced deposits.

Once finalized, the rules are expected to take effect next January.

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