COVID-19 Measures – FAQs for Federally Regulated Deposit-Taking Institutions

Expected Credit Loss (ECL) capital treatment

1. How does the adjustment to CET1 interact with the Tier 2 add-back?

   Any amount included in CET1 capital should be removed from the amount included in Tier 2 capital. Please refer to this document for additional guidance on the Expected Credit Loss (ECL) capital treatment. 

2. Does the ECL treatment differ based on the vintage of the loan? For example, for the 2020 vintage, do these loans keep the 70/30 split throughout, or does the 2020 vintage's credit change by year (i.e. 50/50 in 2021 and 25/75 in 2022)?

   The ECL capital treatment does not differentiate by the vintage of the loan. The scalar changes by reporting date and is applied to the increase in allowances calculated for a given quarter relative to the baseline (net of tax effects). For example, in Q1 2020, a scalar of 70% will apply against the increase in allowances taken for all loans (irrespective of vintage or origination date). 

3. How does the ECL capital treatment interact with the regulatory limits for the inclusion of allowances in Tier 2 Capital (1.25% of Risk-Weighted Assets under the Standardized Approach and 0.6% of Risk-Weighted Assets under the Internal Ratings Based Approach)?

   Allowances included in Common Equity Tier 1 (CET1) capital are subtracted from allowances in Tier 2 capital. If an institution is at the above referenced limits of allowances in Tier 2 capital, the addition to CET1 capital should be offset by a reduction in Tier 2 capital, resulting in no change to the institution's total capital. However, if allowances included in CET1 capital were to exceed allowances eligible for inclusion in Tier 2 capital for an institution, that institution should report no allowances in Tier 2 capital for that quarter, but would continue to add allowances to CET1 capital. The limits on the inclusion of allowances in Tier 2 capital do not apply to the inclusion of allowances in CET1 capital under this transitional arrangement. 

4. In the April 9, 2020 letter, footnote #1 indicates that the tax rate used in the calculation should be the same tax rate as is used for the creation of deferred tax assets that relate to expected credit losses. Is another option available in cases where such rate cannot easily be determined?

   Institutions may choose to apply their effective corporate tax rate for the quarter, calculated as the institutions' income tax expense for the quarter divided by income before income taxes for the quarter. 

Disclosure expectations for ECL transitional arrangements

5. What are the public disclosure requirements for DTIs using the transitional arrangements for expected credit loss provisioning?

   As part of their Pillar 3 regulatory capital disclosure, DTIs are required to disclose the transitional scalar applied during the reporting period as well as each of the Common Equity Tier 1 (CET1), Tier 1 Capital, Total Capital, Leverage and Total Loss Absorbing Capacity (TLAC) ratios had the transitional arrangement for expected credit loss (ECL) provisioning not been applied.
   For D-SIBs and SMSBs, the following lines should be inserted in the Pillar 3 Composition of Regulatory Capital (CC1) template: 

   • 29a: Common Equity Tier 1 Capital (CET1) with transitional arrangements for ECL provisioning not applied
   • 45a: Tier 1 Capital with transitional arrangements for ECL provisioning not applied
   • 59a: Total Capital with transitional arrangements for ECL provisioning not applied
   • 61a: CET1 Ratio with transitional arrangements for ECL provisioning not applied
   • 62a: Tier 1 Capital Ratio with transitional arrangements for ECL provisioning not applied
   • 63a: Total Capital Ratio with transitional arrangements for ECL provisioning not applied

   Please include the add-back to CET1 pertaining to transitional arrangements for ECL provisioning (as a positive amount) in line: 

   • 26: Other deductions or regulatory adjustments to CET1 as determined by OSFI

   For DSIBs and SMSBs, the following lines should be inserted in the Pillar 3 Leverage Ratio Common Disclosure (LR2) template: 

   • 20a: Tier 1 Capital with transitional arrangements for ECL provisioning not applied
   • 22a: Leverage ratio with transitional arrangements for ECL provisioning not applied

   For D-SIBs, the following lines should be inserted in the Pillar 3 Key metrics - TLAC requirements (KM2) template: 

   • 1a: Total loss-absorbing capacity (TLAC) available with transitional arrangements for ECL provisioning not applied
   • 3a: TLAC ratio: TLAC as a percentage of RWA (row 1a / row 2) (%) available with transitional arrangements for ECL provisioning not applied
   • 5a: TLAC Leverage Ratio: TLAC as a percentage of leverage ratio exposure measure with transitional arrangements for ECL provisioning not applied (row 1a / row 4) (%)

Leverage Ratio

6. How should institutions report the temporary exemptions of central bank reserves from the exposure measure of their leverage ratios on the Leverage Requirements Return?

   For the Leverage Requirements Return, up to and including March 31, 2023, institutions should reflect their exemptions of central bank reserves in total on-balance sheet assets (DPAs 1101 and 1108). Total on-balance sheet assets will be reconciled to the accounting balance sheet via DPA 1605. Institutions should reflect the total exemptions made to the exposure measure in DPA 1101 via DPA 1605 as a negative number. 

   Starting April 1, 2023, the temporary exemption of central bank reserves will cease and institutions will be required to include central bank reserves in their leverage ratio exposure measures.  

   As the expiration of the temporary exemption of sovereign issued securities ceased on December 31, 2021, institutions should report sovereign issued securities in total on-balance sheet assets (DPAs 1101 and 1108). Exemptions of sovereign issued securities should no longer be reflected in DPA 1605. 

   Exposures acquired through participation in the Federal Reserve System's Paycheck Protection Program Lending Facility (PPPLF) should continue to be reported on the Leverage Requirements Return and the Basel Capital Adequacy Reporting (BCAR) return as long as they are outstanding, as detailed in the other FAQ related to PPPLF. 

7. Can reverse repos backed by-eligible securities also be excluded temporarily from the leverage exposure measure?

   For reverse repos backed by eligible securities, only the eligible security can be excluded by the institution holding it on its balance sheet. Exclusions should be consistent with how assets are treated under the leverage ratio and any relevant accounting frameworks. Note that, as of January 1, 2022, securities issued by sovereigns are no longer be eligible to be excluded from the leverage ratio, as announced in an August 12, 2021 letter to industry.  

8. What is considered a central bank reserve for purposes of the leverage ratio exclusion?

   The definition of central bank reserves is meant to follow the guidance included in OSFI's LAR Guideline (i.e., Chapter 2, footnote 14). Balances that an institution has in its settlement account at the Bank of Canada should be included in the central bank reserves amount. The exclusion of central bank reserves is not limited to Canadian central bank reserves only as it is intended to cover all central bank reserves an institution holds across jurisdictions, which would also include, for example, reserves institutions hold with the US Federal Reserve.  

   Note that starting April 1, 2023, the temporary exemption of central bank reserves will be unwound and institutions will be required to include central bank reserves in their leverage ratio exposure measures.  

9. Do the assets that are excluded from the leverage ratio have to form a part of an institution's HQLA pool?

   Assets that are excluded from the leverage ratio do not have to form part of an institution's HQLA pool (e.g. the operational requirements applied to HQLA in the LCR do not apply to the leverage ratio exclusions).  

10. Is it mandatory for institutions to exclude central bank reserves from the leverage ratio?

    OSFI expects all institutions to exclude eligible central bank reserves from the leverage ratio in order to support consistent application across institutions and institutions' ability to supply credit to the economy as long as the temporary exemption of central bank reserves is in place (i.e., up to and including March 31, 2023). Note that starting April 1, 2023, the temporary exemption of central bank reserves will be unwound and institutions will be required to include central bank reserves in their leverage ratio exposure measures. 

    Note that, as of January 1, 2022, securities issued by sovereigns are no longer eligible to be excluded from the leverage ratio, as announced in an August 12, 2021 letter to industry.  

11. How should exposures acquired through participation in the Federal Reserve System's Paycheck Protection Program Lending Facility (PPPLF) be reported on the Leverage Requirements Return and the Basel Capital Adequacy Reporting (BCAR) return?

    For the Leverage Requirements Return, institutions should reflect the exemption of these exposures in total on-balance sheet assets (DPAs 1101 and 1108). That is, exposures acquired through the PPPLF should be removed from the total on-balance sheet assets. Total on-balance sheet assets will be reconciled to the accounting balance sheet via DPA 1605. Institutions should reflect the total exemptions made to the exposure measure in DPA 1101 via DPA 1605 as a negative number. 

    For the Basel Capital Adequacy Reporting (BCAR) return, institutions should reflect the exemption of these exposures in "Total on-balance sheet assets for purposes of capital ratios" in Schedule 45. That is, exposures acquired through the PPPLF should be removed from DPA 8924 in Schedule 45 of BCAR. Total on-balance sheet assets will be reconciled to the accounting balance sheet via DPA 8936. Institutions should reflect the total exemptions made to the exposure measure in DPA 8924 via DPA 8936 as a positive number. 

12. Can exposures acquired through the Federal Reserve System's Paycheck Protection Program Lending Facility (PPPLF) be excluded from the leverage ratio?

    Exposures acquired through participation in the PPPLF can be excluded from risk-based capital and leverage ratios. 

13. Will OSFI require any public disclosures related to the leverage ratio exclusions?

    D-SIBs should include all leverage ratio exclusions in the "other adjustments" line in the LR1 template of OSFI's Guideline D-12. Non-D-SIBs should exclude the leverage ratio exclusions from line 1 in the LR2 template of OSFI's Guideline D-12 and add a footnote to explain that the adjustment was made due to guidance issued by OSFI in April 2020. 

Domestic implementation of Basel III

14. In paragraph 150 of Chapter 4 of the 2019 CAR Guideline, institutions may apply a scalar of 0.7 to the SA-CCR exposure amounts that enter into the formulas described in paragraphs 151 and 157 (the CVA capital charge) between the first fiscal quarter of 2019 and the fourth fiscal quarter of 2021 (as the revised CVA framework was originally to be implemented in Q1 2022). Since the implementation of this framework has been delayed until the beginning of fiscal Q1 2024, is the use of the 0.7 scalar also extended until the end of fiscal Q4 2023?

    Yes, the 0.7 scalar mentioned in paragraph 150 of Chapter 4 of the 2019 CAR Guideline can continue to be used by institutions until the end of the fourth fiscal quarter of 2023. 

March 30^th letter on the Capital treatment for exposures acquired through the new Government of Canada programs

15. For the Business Development Bank of Canada (BDC) co-lending program, could OSFI clarify whether the full amount or only the 20% portion funded by the bank should be included in the loan exposure aggregation for the retail small business $1.25 million threshold?

    Consistent with the March 30^th, 2021 letter, under the BDC co-lending program only the DTI's 20% portion is considered an exposure to the borrower. This same exposure would apply for the purpose of the $1.25 million threshold under the standardized approach to credit risk (as set out in paragraph 25 of Chapter 3 of the 2019 Capital Adequacy Requirements (CAR) Guideline) and under the internal ratings based approach (as set out in paragraph 29 of Chapter 6 of the 2019 CAR Guideline).