Office of the Superintendent of Financial Institutions
OSFI has prepared the following questions and answers for federally regulated financial institutions about measures it has taken to address issues stemming from COVID-19.
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Any amount included in CET1 capital should be removed from the amount included in Tier 2 capital. Please refer to this document (link) for additional guidance on the Expected Credit Loss (ECL) capital treatment.
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).
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.
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.
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:
Please include the add-back to CET1 pertaining to transitional arrangements for ECL provisioning (as a positive amount) in line:
For DSIBs and SMSBs, the following lines should be inserted in the Pillar 3 Leverage Ratio Common Disclosure (LR2) template:
For D-SIBs, the following lines should be inserted in the Pillar 3 Key metrics - TLAC requirements (KM2) template:
For the Leverage Requirements Return, 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.
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.
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.
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.
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).
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.
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. Per that letter, central bank reserves will continue to be excluded from the leverage ratio exposure measure for DTIs until otherwise notified.
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.
Exposures acquired through participation in the PPPLF can be excluded from risk-based capital and leverage ratios.
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.
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.
Consistent with the March 30th, 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).