What is OSFI’s CAR guideline?
By Nick Jang, founder of MINERVA Studio ·
The short answer
CAR, the Capital Adequacy Requirements guideline, is OSFI’s rulebook for how much capital a federally regulated bank, bank holding company, trust or loan company must hold against its credit, market and operational risk. It’s Canada’s version of the Basel framework, published as nine separate chapters. The minimums are 4.5% Common Equity Tier 1, 6% Tier 1 and 8% total capital, plus a 2.5% conservation buffer, so 7%, 8.5% and 10.5% in practice. CAR 2027, published on 10 September 2026, takes effect on 1 November 2026 or 1 January 2027 depending on the institution’s year-end.
Who it applies to
Banks (federal credit unions included), bank holding companies, and federally regulated trust and loan companies. Insurers have their own capital tests, LICAT for life insurers and MCT for property and casualty, so CAR isn’t theirs.
It applies on a consolidated basis to the six domestic systemically important banks (D-SIBs) and to small and medium-sized banks (SMSBs) in Categories I to III. The smallest category gets a simpler ratio, covered below.
The nine chapters
| Chapter | Covers |
|---|---|
| 1. Overview of risk-based capital requirements | The ratios, the buffers, how risk-weighted assets add up, and the output floor. |
| 2. Definition of capital | What counts as Common Equity Tier 1, Additional Tier 1 and Tier 2, and the deductions. |
| 3. Operational risk | Capital for losses from failed processes, people, systems or outside events. |
| 4. Credit risk: standardized approach | Risk weights set by OSFI for each kind of exposure. |
| 5. Credit risk: internal ratings-based (IRB) approach | Capital from the bank’s own approved models of default probability and loss. |
| 6. Securitization | Capital for securitization exposures, whether the bank originates or invests. |
| 7. Settlement and counterparty risk | Exposure to a trading counterparty defaulting, including derivatives. |
| 8. Credit valuation adjustment (CVA) risk | Capital for changes in the market value of counterparty credit risk on derivatives. |
| 9. Market risk | Capital for trading book positions, under OSFI’s implementation of the Basel market risk rules. |
When people search for CAR chapter 5 they usually want the IRB rules, which only banks with OSFI approval to use their own credit models follow. Chapter 9 is the market risk chapter, mostly relevant to banks with large trading books.
The ratios and buffers
| Ratio | Minimum | With the 2.5% conservation buffer | D-SIB target (before the DSB) |
|---|---|---|---|
| Common Equity Tier 1 (CET1) | 4.5% | 7.0% | 8.0% |
| Tier 1 | 6.0% | 8.5% | 9.5% |
| Total capital | 8.0% | 10.5% | 11.5% |
The D-SIBs carry an extra 1% CET1 surcharge, which is where their higher targets come from. On top of that sits the Domestic Stability Buffer (DSB), which OSFI can set anywhere from 0 to 4% of risk-weighted assets and reviews twice a year. It also has to be met with CET1.
Risk-weighted assets are the sum of credit, market and operational risk, with the market and operational capital charges multiplied by 12.5 to put them on the same footing as credit risk. Leverage has its own guideline, separate from CAR.
The smallest deposit-takers (Category III SMSBs) use a Simplified Risk-Based Capital Ratio, capital divided by adjusted total assets plus operational risk-weighted assets, instead of the full calculation.
The output floor
A bank that uses its own models could, in theory, model its way to very low capital. The output floor stops that: total risk-weighted assets can’t fall below a set percentage of what the standardized approaches would produce. Under CAR the floor factor is 67.5% until further notice, and OSFI has said it will give at least two years’ notice before raising it. A bank newly approved for IRB starts at 90% and steps down from there with OSFI’s agreement.
What changed in CAR 2027
OSFI published the final CAR 2027 guideline on 10 September 2026 after consulting on a draft. Its letter lists the changes from the draft, and most of them lower risk weights for particular exposures. A few of the ones banks talk about:
- Corporate SME exposures under the standardized approach: 75%, down from 85% in the draft.
- Unrated non-investment-grade corporates: 135%, down from 150%.
- Small businesses can get regulatory retail risk weights up to $2.5 million of exposure, up from $1.5 million.
- Exposures to Canadian D-SIBs and certain provincial D-SIFIs, covered bonds included: 15%, down from 20%.
- New treatments for land acquisition, development and construction loans, tied to pre-sales, pre-leases and loan-to-value.
- A streamlined IRB application and approval process for small and medium-sized banks.
- Several market risk adjustments, and fewer formal approvals in that chapter.
The guideline takes effect on 1 November 2026 for banks with an October 31 year-end and on 1 January 2027 for those with a December 31 year-end. CAR 2026 stays valid until the end of the reporting period on 31 January 2027.
Where models and model risk come in
Much of CAR runs on models. IRB banks estimate probability of default, loss given default and exposure at default with their own models; banks with trading books may use internal models for market risk; counterparty exposure can be modelled too. Each of those is a model under OSFI’s E-23, so it has to be inventoried, rated, independently validated, approved and monitored, on top of the specific approval CAR requires.
That’s a large share of a bank’s highest-rated models. MINERVA keeps them in one model inventory with their validation and approval history, so a capital model’s evidence is in the same place as every other model’s. See OSFI E-23 software.
Related questions
What does CAR stand for in OSFI?
Capital Adequacy Requirements. It is OSFI’s guideline setting the minimum capital that banks, bank holding companies and federally regulated trust and loan companies must hold.
What is the minimum CET1 ratio in Canada?
4.5% of risk-weighted assets, or 7% with the 2.5% capital conservation buffer. The domestic systemically important banks have an 8% target plus the Domestic Stability Buffer.
When does OSFI CAR 2027 take effect?
On 1 November 2026 for institutions with an October 31 fiscal year-end, and on 1 January 2027 for those with a December 31 year-end. OSFI published it on 10 September 2026.
What is chapter 5 of the OSFI CAR guideline?
Credit risk under the internal ratings-based (IRB) approach: how banks with OSFI approval calculate capital from their own models of default probability, loss given default and exposure.
Does CAR apply to insurance companies?
No. Life insurers follow LICAT and property and casualty insurers follow the MCT guideline. CAR covers banks, bank holding companies and federally regulated trust and loan companies.
What is the output floor in CAR?
A limit on how far a bank’s own models can lower its capital: risk-weighted assets cannot fall below 67.5% of what the standardized approaches would give. OSFI has set the factor at 67.5% until further notice.
Sources
- OSFI — Capital Adequacy Requirements (CAR) guideline (2026)
- OSFI — Capital Adequacy Requirements (CAR) guideline (2027)
- OSFI — Capital Adequacy Requirements Guideline (2027), letter of 10 September 2026
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A plain-language explanation, not legal advice. The regulator’s own text is the source; read it, and take advice on how it applies to your institution.