Revisions to the capital floor

Document Properties

  • Type of Publication: Letter
  • Date: January 12, 2018
  • To:
    • Banks
    • Bank Holding Companies
    • Federally Regulated Trust and Loan Companies
    • Cooperative Retail Associations

As part of the domestic implementation of the Basel II framework in 2008, OSFI introduced a floor on the minimum risk-based capital requirement for institutions using advanced approaches for credit risk or operational riskFootnote 1.  This floor placed a minimum on the required regulatory capital for a bank using internal models, relative to the Basel I framework. Capital floors and their associated disclosure requirements support the credibility and comparability of risk-weighted capital calculations.

The floor was initially intended to be transitional during the implementation of the Basel II frameworkFootnote 2 and was based on Basel I capital requirements. However in 2009, due to the global financial crisis, the Basel Committee on Banking Supervision (BCBS) decided to keep the transitional floor in place. OSFI recognizes that a capital floor based on Basel I standards has become increasingly impractical and therefore no longer meets the original objectives.

As a result, OSFI is implementing a revised capital floor (as described in Annex 1) that will set a minimum on the required regulatory capital for banks using internal models relative to the Basel II standardized approach. It will be implemented effective Q2 2018 with the floor factor transitioned in over three quarters. The floor factor will be set at 70% in Q2 2018, increasing to 72.5% in Q3 2018 and 75% in Q4 2018. The capital floor will be further updated over time as changes are made to OSFI’s capital framework.

As a member of the BCBS, OSFI participated in the development and finalization of the Basel III reformsFootnote 3, which includes the replacement of the existing capital floor with a more robust, risk-sensitive output floor based on the Basel III standardized approaches. Given that the proposed implementation of the Basel III output floor and revised standardized approaches is not expected to begin before 2022, this interim step will improve risk-sensitivity while ensuring the objectives of the capital floor continue to be met.

This change will be reflected in Chapter 1 of OSFI’s Capital Adequacy Requirements (CAR) Guideline when the guideline is next updated. OSFI also intends to repeal Guideline A-3 Transitional Period Capital Floor Requirement for Institutions Using the Internal Ratings Based Approach to Credit Risk.

The revised floor must be reported in the BCAR regulatory return as of Q2 2018 according to the instructions provided in Annex 2. Changes will be made to the BCAR return to reflect the revised floor for Q1 2019.

Questions concerning these changes can be sent to Catherine Girouard, Acting Managing Director, Capital Division by e-mail at

Yours truly,

Carolyn Rogers
Assistant Superintendent
Regulation Sector

Annex 1 – Detailed description of the revised capital floor

Institutions using advanced approaches for credit risk or operational risk will be subject to the capital floor. In applying the capital floor, institutions need to calculate the “floor requirement” and “modelled requirement” as defined below. If there is a positive difference between 75%Footnote 4 of the “floor requirement” and the bank’s “modelled requirement” then that difference is added to the bank’s modelled RWA.

“Modelled requirement” is the sum of “modelled RWA” LESS 12.5* any allowances included in capital PLUS 12.5 * any allowance shortfall deduction.

“Modelled RWA” is a measure of total RWA (for all risk types) using the approaches for which the bank has received OSFI approval, including any partial use portfolios that are treated under non-modelled approaches.

“Floor requirement” is the sum of Floor RWA LESS 12.5* allowances included in capital using the standardized methodology.

“Floor RWA” includes Credit Risk RWA and Market Risk RWA as well as ‘Other Credit RWA’ and CVA RWA. 

Under the floor:

Credit Risk RWA is calculated using the standardized approach for credit risk as outlined in the Capital Adequacy Requirements (CAR) Guideline for all asset classes.

Market Risk RWA is calculated using the value at risk (VaR) and standardized approaches following the treatment outlined in CAR Chapter 9, excluding the comprehensive risk measure (CRM), incremental risk charge (IRC), and stressed VaR (SVaR) capital charges.

Other Credit RWA includes standardized RWA for assets that have no IRB approach, the risk weighting treatment for definition of capital items not deducted from capital, and the RWA charges for central counterparty (CCP) exposures and for failed and non-Delivery-versus-Payment (DvP) trades. Generally, Other Credit RWA reported under the Floor RWA should be consistent with Other Credit RWA reported under Modelled RWA.

Credit Valuation Adjustment (CVA) RWA should be consistent with the CVA RWA reported under Modelled RWA and should reflect the phase-in of the CVA capital charge.

The table below provides additional details of the revised floor calculation.

Asset Class/Exposure type Approach Guideline reference for treatment in the revised floor
Corporate Standardized CAR Chapter 3: 3.1.7 and 3.1.16
Sovereign Standardized CAR Chapter 3: 3.1.1 through 3.1.4 and 3.1.16
Bank Standardized CAR Chapter 3: 3.1.5, 3.1.6 and 3.1.16
Retail Mortgages (incl. HELOCs) Standardized CAR Chapter 3: 3.1.9 through 3.1.12 and 3.1.16
Other retail, excl. SBEs Standardized CAR Chapter 3: 3.1.8 and 3.1.16
SBEs treated as Other Retail Standardized CAR Chapter 3: 3.1.8 and 3.1.16
Equity Standardized CAR Chapter 3: 3.1.18, and 3.1.19
Trading Book Standardized CAR Chapter 3: 3.1.13, 3.1.14 and 3.1.16
Securitizations Standardized CAR Chapter 7, excluding paragraph 54 of section 7.4.2
Other Credit RWA (incl. CCPs and failed and non- DvP trades) Standardized CAR Chapter 3: 3.1.19, Chapter 2 and Chapter 4
CVA Std or Adv* CAR Chapter 4, including phase-in
Market Risk Basel 2 CAR Chapter 9: Standardized and VaR (i.e. excluding (CRM), Appendix 9-9 (IRC), and paragraph 199i (SVaR))

*CVA RWA should be the same under both Modelled RWA and Floor RWA.

Annex 2 - Specific BCAR reporting instructions

All current BCAR validation rules related to the floor will be disabled as of Q2 2018.

The following data points reported on Schedule 1 are to be completed as per below:

Description DPA Instructions for completion
Authorized capital floor adjustment factor (%) 1188 Report the factor applicable for that quarter
Net Tier 1 capital 1010 Leave this cell blank
Total capital 1011 Leave this cell blank
Risk-weighted assets 1012 Report the revised Floor RWA
Tier 1 ratio per Guideline A-3 (%) 1013 Leave this cell blank
Total ratio per Guideline A-3 (%) 1014 Leave this cell blank
Deductions taken from Tier 1 and 2 capital 1015 Leave this cell blank
Eligible Stage 1 and Stage 2 allowance included in Tier 2 1016 Report the allowances included in capital under the revised floor


Footnote 1

Capital Adequacy Requirements Guideline, Chapter 1, Section 1.9 Capital floor – advanced approaches available at

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Footnote 2

 Basel Committee on Banking Supervision, International convergence of capital measurement and capital standards: A revised framework comprehensive version, June 2006, paragraphs 45–47, available at 

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Footnote 3

Basel Committee on Banking Supervision, Basel III: Finalising post-crisis reforms available at

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Footnote 4

The floor factor is normally set at 75%; however, OSFI may set at higher or lower floor factor.

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