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Fintech Opportunities in the Wake of Tightened Credit Liquidity in Canada

Better Dwelling | Jun 20, 2023

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Canada's bank regulator, the Office of The Superintendent of Financial Institutions, has increased the Domestic Stability Buffer (DSB) to 3.5% of risk-weighted assets in response to rising delinquencies and overleveraged households, which may create opportunities for fintech lenders offering alternative finance solutions.

  • Regulatory Measures and Credit Throttling:
    • Canada’s bank regulator, the Office of The Superintendent of Financial Institutions (OSFI), has increased the Domestic Stability Buffer (DSB) by 50 basis points to 3.5% of risk-weighted assets (RWA). This move, which follows a similar-sized increase in February, is designed to curb credit and raise borrowing costs amid concerns over a potential risk event. The increased DSB implies banks will need to set aside more capital, which could tighten credit availability and drive up costs for borrowers.
    • This development presents a potential opportunity for fintech firms to fill the credit void left by traditional banks. By offering alternative lending solutions, fintech companies can step in to meet the demand for credit, potentially gaining market share in the process.
    • The move to raise DSB marks the end of an era of low rates.

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  • The financial environment is becoming more stringent, with regulators demanding higher levels of capital buffers. Fintech firms could capitalize on this by offering more flexible and accessible financial products and services. Fintech innovations such as risk modelling, credit scoring and AI can be utilized to provide customized, affordable credit solutions.
  • Response to Overleveraged Households & Rising Delinquencies:
    • The regulator's decision comes at a time when Canada’s systemically important banks are extending mortgage repayment terms longer than typically allowed.
    • This move seems to be an attempt to avoid causing hardship for overleveraged borrowers. Increasing the DSB forces banks to become more conservative with their lending practices.
    • By leveraging technology to assess risk, fintech firms could provide loans to customers who may be considered overleveraged by traditional standards, yet still have the capacity to repay.

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NCFA Jan 2018 resize - Fintech Opportunities in the Wake of Tightened Credit Liquidity in CanadaThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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