Office of the Superintendent of Financial Institutions
The Office of the Superintendent of Financial Institutions (OSFI) is releasing the final version of the Large Exposure Limits guideline for implementation in Q1 2020 by Canadian D-SIBs. The guideline, which was originally issued in 1994, establishes limits for a bank's exposure to a single counterparty (including connected counterparties), measured as a percentage of capital.
In 2014, the Basel Committee on Banking Supervision (BCBS) published its standard on large exposure risk management: Supervisory Framework for Measuring and Controlling Large Exposures. OSFI's final guideline incorporates the BCBS guidance to reflect current risk management sound practices and provides additional guidance on methods OSFI expects D-SIBs to use for identifying, measuring, managing and monitoring large exposures.
The final guideline revises the large exposure limits calculation, including: reducing the eligible capital base from Total capital to Tier 1 capital; introducing tighter limits for exposure to Global Systemically Important Banks (G-SIBs) and Canadian D-SIBs; and recognizing eligible credit risk mitigation techniques for measuring exposure, i.e., exposure is measured on a net basis rather than a gross basis. The guideline also provides additional guidance for determining groups of connected counterparties.
Annex 1 summarizes comments received and explains how the comments have been addressed in the final guideline. We thank those who participated in the consultation process.
Questions concerning the final guideline may be addressed to Lindsay Cheung, Senior Analyst, Capital Division by email at firstname.lastname@example.org.
The large exposures framework contributes to the stability of the financial system by mitigating the risk of contagion between systemically important banks. Given the small number of Canadian D-SIBs and their significant market share, OSFI considers it appropriate to have a limit more stringent than the general 25% limit for a D-SIB exposure to another D-SIB or to a G-SIB. The BCBS also encourages jurisdictions to consider stricter limits for exposure between D-SIBs.
OSFI decided to retain the limit for inter-G-SIB exposure at 15% of Tier 1 Capital and to increase the limit for exposure of a Canadian G-SIB to a Canadian D-SIB to 20% of Tier 1 Capital. OSFI also set the limit for a Canadian D-SIB's exposure to a G-SIB or to another Canadian D-SIB at 20% of Tier 1 capital. This recognizes the potential implications and unintended consequences of significantly tightening the limits relative to the original Guideline B-2, combined with changes in calculation method (e.g., Tier 1 capital versus Total capital, net exposure versus gross exposure, etc.).