der stress. If that protection is withdrawn or under-delivers, banks could face higher credit losses and capital pressure, which may limit their ability to lend. The review will also test banks’ risk ratings and governance, putting both models and oversight under the microscope.
Why should I care?
For markets: Regulatory attention can change bank risk math.
When a regulator calls exposures “material,” investors start pricing in tougher supervision, possible capital add-ons, or changes in deal structures. RBC Capital Markets estimates Bank of Montreal and CIBC have among the largest “financial-loan” exposures at about 11% and 10% of gross loans, while Scotiabank and National Bank are lower; RBC has said NBFI and financing products were 8% of loans last quarter. If OSFI tightens expectations, bank profitability and credit growth could cool even without a recession.
The bigger picture: Shadow banking can still squeeze the real economy.
Using NBFIs for protection can look like risk is spread out, but stress can boomerang if those firms reprice risk or step back at the same time. That could force banks to hold more capital against existing loans, slowing new lending to households and businesses. OSFI’s point is simple: the structures matter, and they may behave differently once defaults rise.