Canada's business lending market has been frozen in regulatory amber since shoulder pads were fashionable. Still, OSFI's Peter Routledge just fired the shot that could finally thaw the $18 trillion SME financing desert. Here’s why you should be paying attention to the risk-weighting recalibration conversation (don’t change the channel yet!).
The Numbers Don't Lie: We Have a Problem
Let's start with a fact that should make every banking executive uncomfortable: commercial lending accounted for about 60 percent of banks' loan portfolios in 1982, and it now makes up about 25 percent of current loan books. This isn't a gradual market evolution—it's a systematic retreat from an entire customer segment.
The culprit? A risk-weighting system that treats business loans like radioactive waste while rolling out the red carpet for mortgage lending. Business loan risk weightings are often three to four times higher than loans to households, such as a mortgage, which skews their relative profitability.
Meanwhile, nearly half of SMEs (49.3%) in Canada sought external financing in 2023, but only 14.6% of SMB loans were approved by big banks. If this were a dating app, we'd call it a catastrophic mismatch.
OSFI's Regulatory Awakening
The head of the Office of the Superintendent of Financial Institutions (OSFI), Peter Routledge, said Wednesday that the regulator is consulting with banks and life insurers "to help them help the country," which is perhaps the most Canadian way possible to admit they've been accidentally sabotaging business lending for four decades.
The proposed changes target the technical risk-weighting framework that determines how much capital banks must hold against different types of loans. Think of it as regulatory accounting finally catching up to economic reality.
The Fintech Disruption Context
While traditional banks have been hamstrung by regulatory math that makes business lending unattractive, fintech upstarts have been eating their lunch. Digital assets and AI-focused fintechs accounted for most investments in the first half of 2025, with US$1.62 billion invested in Canadian fintechs across 60 deals in the year's first half.
The alternative lending market has exploded precisely because traditional banks retreated from business lending. The digital lending market is expected to be worth $20.5 billion by 2026, about double what it was in 2021, and embedded lending platforms are projected to reach $23.31 billion by 2031—a whopping 20.4% CAGR.
The Competition Bureau's Wake-Up Call
As if OSFI's announcement wasn't enough of a signal, the Competition Bureau is consulting Canadians as it prepares to launch a market study into the state of competition in the lending sector for small and medium-sized enterprises (SMEs) in Canada. Their preliminary findings should make every banking executive squirm:
- The big banks dominate Canada's lending sector
- New or smaller lenders appear to face barriers to entry and expansion
- SMEs face higher borrowing costs than larger firms and this gap is larger in Canada than in other OECD countries
Translation: the regulatory environment has accidentally created an oligopoly that's failing Canadian businesses.
The Strategic Opportunity
For institutions with the vision to act quickly, OSFI's risk-weighting revision represents a once-in-a-generation reset. Consider the implications:
- Immediate Capital Efficiency Gains: Lower risk weightings mean better return on equity for business lending portfolios. CFOs can finally make the math work without creative accounting.
- Competitive Positioning: Early movers can capture market share while competitors still figure out their strategy. The SME lending market has been underserved for so long that there's massive pent-up demand.
- Fintech Partnership Opportunities: Traditional institutions can finally compete with fintech lenders on economics, opening up collaboration opportunities that weren't previously viable.
- Digital Transformation Catalyst: This regulatory change covers the digital lending infrastructure investments many banks have been avoiding.
What to Watch Moving Forward
OSFI isn't promising an overnight transformation. Mr. Routledge warned that OSFI is not "the secret sauce or the magic thing" that will suddenly unlock much greater lending to businesses among banks.
But the signal is clear: Canada's financial system finally acknowledges that business lending matters, and the regulatory framework needs to support economic growth rather than inadvertently stifle it.
The institutions that start building their business lending capabilities now—before the risk-weighting changes are finalized—will be positioned to dominate when the floodgates open.
The Bottom Line: After 40 years of regulatory-induced market distortion, Canada's business lending sector is about to become competitive again. The question isn't whether this creates opportunity—it's whether your institution will be ready to seize it.