Capital Adequacy Requirements (CAR) Guideline
OSFI sets guidance to keep Canada’s banks safe and reliable. At the heart of this, is the Capital Adequacy Requirements (CAR) Guideline. It explains how much financial buffer—called capital—federally regulated banks, trust and loan companies, and bank holding companies must hold to absorb losses and continue operating through periods of stress.
In simple terms, capital is the money a bank can use to cover unexpected losses without putting depositors or the financial system at risk.
A risk-based approach
The CAR guideline is risk-based. This means institutions that take on more risk must hold more capital. The guideline addresses three main categories of risk:
- Credit Risk: The possibility that borrowers won’t repay their loans.
- Market Risk: Changes in the value of investments and trading positions.
- Operational Risk: Losses from failed processes, system outages, cyber incidents, or fraud.
By linking capital to these risks, the CAR Guideline encourages prudent lending and investing while discouraging excessive risk-taking.
What counts as capital
Not all capital is equal. The strongest form is common equity and retained earnings, which serve as the first line of defence in a downturn.
The CAR guideline sets detailed guidance for calculating the capital needed for different activities like residential mortgages, corporate loans and exposures to other financial institutions.
These calculations determine how much buffer a bank must maintain before paying dividends, growing its balance sheet, or expanding into new products or business lines.
Keeping the rules current
OSFI regularly updates the guideline to reflect new conditions and emerging risks. This ensures that capital requirements keep pace with changing markets, interest rate movements and new product designs.
Why it matters for Canadians
For Canadians, the impact is straightforward: strong capital buffers help banks absorb losses without failing. This protects deposits, keeps credit flowing to households and businesses, and sustains confidence in the financial system.