Office of the Superintendent of Financial Institutions
Subsection 485(1) and 949(1) of the Bank Act (BA), subsection 473(1) of the Trust and Loan Companies Act (TLCA) and subsection 409(1) of the Cooperative Credit Associations Act (CCAA) require banks, bank holding companies, trust and loan companies and cooperative retail associations, respectively, to maintain adequate and appropriate forms of liquidity.
The LAR Guideline is not made pursuant to subsection 485(2) or 949(2) of the BA, subsection 473(2) of the TLCA or subsection 409(2) of the CCAA. However, the liquidity metrics set out in this guideline provide the framework within which the Superintendent assesses whether a bank, a bank holding company, a trust and loan company or cooperative credit association maintains adequate liquidity pursuant to the Acts. For this purpose, the Superintendent has established two minimum standards: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). These standards – in conjunction with additional liquidity metrics where OSFI reserves the right to apply supervisory requirements as needed, including the net cumulative cash flow (NCCF), the liquidity monitoring tools and the intraday liquidity monitoring tools – when assessed as a package, provide an overall perspective of the liquidity adequacy of an institution. The LAR Guideline should be read together with the Basel Committee on Banking Supervision’s (BCBS) Principles for Sound Liquidity Risk Management and Supervision and OSFI’s Guideline B-6: Liquidity Principles. As such, OSFI will conduct detailed supervisory assessments of both the quantitative and qualitative aspects of an institution’s liquidity risk, as presented in the LAR Guideline and Guideline B-6, respectively. Notwithstanding that a bank, a bank holding company, a trust and loan company or cooperative credit association may meet the aforementioned standards, the Superintendent may by order direct a bank or bank holding company to take actions to improve its liquidity under subsection 485(3) or 949(3), respectively, of the BA, a trust and loan company to take actions to improve its liquidity under subsection 473(3) of the TLCA or a cooperative retail association to take actions to improve its liquidity under subsection 409(3) of the CCAA.
OSFI, as a member of the BCBS, participated in the development of the international liquidity framework, including Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools (January 2013), Basel III: the Net Stable Funding Ratio - consultative document (January 2014) and Monitoring tools for intraday liquidity management (April 2013). This domestic guidance is based on the Basel III framework, supplemented to include additional OSFI-designed measures to assess the liquidity adequacy of an institution.
Where relevant, the Basel III paragraph numbers are provided in square brackets at the end of each paragraph referencing material from the Basel III framework. Some chapters include boxed-in text (called OSFI Notes) that set out how certain requirements are to be implemented by Canadian banks, bank holding companies, trust and loan companies and cooperative credit associations, collectively referred to as ‘institutions’.
The Liquidity Adequacy Requirements (LAR) for banks, bank holding companies, trust and loan companies and cooperative credit associations are set out in six chapters, each of which has been issued as a separate document. This document, which contains Chapter 4 – Net Cumulative Cash Flow, should be read together with the other LAR chapters which include:
During periods of idiosyncratic stress to specific regions or to individual institutions, OSFI may, as necessary, require a supervisory-communicated, institution-specific NCCF level to be met on a Canadian currency basis and/or a foreign currency balance sheet basis, including USD, EUR, GBP and any other currency determined to be necessary by OSFI.
Cash flows related to days 29, 30 and 31 of a given month should be reported in the week 4 bucket and applied the weekly run-off rate assigned to week 4 cash flows. Cash flows related to the remaining days of week 5 should be reported in the month 2 bucket and applied the monthly run-off rate assigned to month 2 flows.
Return to footnote 1 referrer
Where financing is arranged though structured investment vehicles, financial institutions should consider the inability to refinance maturing debt during liquidity crises.
Return to footnote 2 referrer
Fiduciary is defined in this context as a legal entity that is authorised to manage assets on behalf of a third party. Fiduciaries include asset management entities such as pension funds and other collective investment vehicles.
Return to footnote 3 referrer
Beneficiary is defined in this context as a legal entity that receives, or may become eligible to receive, benefits under a will, insurance policy, retirement plan, annuity, trust, or other contract.
Return to footnote 4 referrer