Office of the Superintendent of Financial Institutions
This document Footnote* is intended to provide transitional support to Financial Institutions preparing to report capital adequacy information where they are adopting the Standardized Approach to credit risk and the Basic Indicator or The Standardized Approach to operational risk.
The questions in the document represent frequent enquiries received by OSFI from numerous Financial Institutions. The questions have been grouped into categories of issues for easy identification.
The questions and responses contained in this paper are intended to act as general guidance in response to commonly asked questions about the completion of BCAR. Such responses should not be considered as a definitive response or ruling in respect of a particular set of circumstances experienced by an individual financial institution.
The responses contained herein do not negate the need for entities with questions related to a particular set of circumstances to contact the Capital Division through their Relationship Manager to provide additional detail in order to obtain guidance from OSFI in respect of a particular situation.
A: Under the CAR Guideline, residential construction loans should be risk weighted at 100%. These types of loans are not consistent with the definition of a residential mortgage and thus do not qualify for a 50% risk weight under current CAR or a 35% risk weight under Basel II. This lower risk weight is intended for the consumer acquisition of completed properties that are owner-occupied or rented.
A: Residential mortgages to a person(s) or guaranteed by a person(s) may qualify for retail treatment provided the criteria listed in section 3.1.8. of the CAR Guidelines are met. If the criteria are not met they should be risk-weighted at 100%.
A: If a residential property has a commercial element, it should not be considered a qualifying residential mortgage. Residential mortgages with a commercial component that meet the retail criteria listed in section 3.1.8. of the CAR Guideline are risk weighted at 75%. If the criteria are not met or if there is a significant commercial component, they should be risk weighted at 100%.
A: When reporting past due mortgages, the exposure amount is initially reported in the 100% risk-weight category. The government guarantee is then recognized under credit risk mitigation. The portion of the exposure that is subject to the CMHC guarantee is ultimately risk-weighted according to the rating for Canada (currently 0%).
A: Under the standardized approach to credit risk, amounts that have been securitized are reported on Schedule 14. Please refer to page 6 of the BCAR reporting instructions: "In both the Standardized and IRB approaches, securitization-related amounts receive different credit risk treatment, and are generally reported separately, from all other exposures." Securitization-related exposures are defined in section 6.1 of the guideline. Please refer to Page 17 of the BCAR instructions that deal with the reporting of securitization exposures.
A: Yes, if the loan is to a small business (including incorporated entities) and meets the 4 criteria in section 3.1.8, it would qualify as a retail exposure and receive a 75% risk weight.
A: OSFI has not provided any specific guidance on granularity. However, as a starting point please refer to Annex 11 paragraph 13 of the Basel Framework that states "One way of achieving this may be to set a numerical limit that no aggregate exposure to one counterpart can exceed 0.2% of the overall regulatory retail portfolio."
A: An exposure other than a qualifying residential mortgage [3.1.9] that exceeds the $1.25 million threshold for retail, does not qualify as a retail exposure, and should be risk-weighted at 100%.
A:A HELOC that does not qualify as a residential mortgage may be treated as a retail claim provided it meets the other criteria for non-mortgage loans in the standardized approach definition of retail and be risk-weighted at 75%. Risk weights should apply to both undrawn commitments (after applying credit conversion factors) and to drawn amounts.
A: As per section 3.1.14 of OSFI's Capital Adequacy Requirements (CAR) Guideline, commercial mortgages are not considered retail and should be risk-weighted at 100%. In order for a non-qualifying residential mortgage to qualify for the retail risk-weight of 75%, the maximum aggregate retail exposure to one counterpart cannot exceed $1.25 million and the other conditions of section 3.1.8 of OSFI's CAR guideline must be met. The only case where this threshold does not apply is to mortgages on residential property that meet the conditions of section 3.1.9 of OSFI's CAR guideline.
A: The $1.25 million threshold applies whether or not the loan is secured. Please note that the ultimate risk-weight can be reduced through the recognition of eligible collateral. There are two methodologies for recognizing collateral - the simple approach and the comprehensive approach. Please refer to Chapter 4 - Credit Risk Mitigation of OSFI's CAR guideline for details.
* A: Commitments involve a written contract or agreement and may often include some form of consideration such as a commitment fee. Commitments that are unconditionally cancellable at any time without notice, or that effectively provide for cancellation due to deterioration in creditworthiness of the borrower, attract a 0% CCF. This implies that there is a formal review of the facility at least annually to detect perceived deterioration in credit quality. Retail commitments are unconditionally cancellable if the terms permit the institution to cancel them to the full extent allowable under consumer protection and related legislation. *.
* Commitments that are not unconditionally cancellable attract a CCF factor that varies with maturity. A 20% CCF factor applies to commitments with an original maturity of one year or less and a 50% CCF factor applies to commitments with an original maturity of over one year. The credit equivalent amount of a commitment (after applying the appropriate CCF factor to the notional amount) is subject to a risk weight. *.
* The risk weight for government insured mortgages is 0% and the risk weight for uninsured mortgages that meet the criteria set out in section 3.1.9 of the capital adequacy guideline is 35%. The risk weight for other retail exposures that meet the criteria set out in section 3.1.8 of the capital adequacy guideline is 75%. *.
A: Section 3.6.1. states that the 0% CCF applies to commitments that are unconditionally cancellable at any time by the institution without notice or that effectively provide for automatic cancellation due to deterioration in the borrower's credit worthiness. Subject to the details of the request for a ruling, OSFI will continue to indicate that any contractual commitment to the lender to provide notice precludes the use of a 0% conversion factor.
A: The 150% risk weight category applies to exposures including undrawn commitments (using credit conversion factors specified in the CAR Guideline) to poorly rated counterparties, for example, claims on sovereigns, PSEs, banks, and securities firms where the sovereign is rated below B- and claims on corporates (including PSEs treated like corporates) where the rating is below BB- (see section 3.1.16), and where the FI has elected to recognize ratings for corporate exposures.
A: The DTI ECAI assessment does not override the sovereign ECAI assessment. The risk weight is based on the risk weight of the country in which the DTI is incorporated (whereby a DTI is assigned a risk weight one level higher than the sovereign). All claims on all Canadian DTIs, whether federally or provincially incorporated, are risk-weighted based on the risk weight for Canada. Since Canada currently has a high credit rating, claims on Canadian DTIs would presently be risk weighted at 20%.
A: The use of ECAIs is addressed in section 3.7.1 of the CAR Guideline (para 90-108). Institutions must select rating agencies from the list in section 3.7.1 and use the selected rating agency or agencies and their ratings consistently for each type of exposure. Banks will not be allowed to cherry-pick between the ratings provided by more than one rating agency. A bank can choose to use the ratings from a single eligible ECAI exclusively.
As per paragraphs 97 and 98 of the CAR Guideline, if there are two assessments by rating agencies selected by the bank that map into different risk weights, the higher risk weight is used. If there are three or more assessments with different risk weights, the assessments corresponding to the two lowest risk weights should be referred to and the higher of the two risk weights is used. For example, if the rating agencies assessments map to a 20%, 50% and 100% risk weight, the institution would use a 50% risk weight.
A:The above forms of collateral are not treated as collateral under the CAR Guideline.
A: Generally, a repo under the simple approach can achieve a 0% risk weight provided it meets all of the conditions in paragraph 170-171 & 182-183 of the CAR Guideline. It should be noted that not all PSE exposure are eligible for the 0% risk weight; therefore, for certain PSE exposures the risk weight floor would apply.
A: In no case will the recognition of collateral result in a higher risk weight than the unsecured exposure (see paragraph 113 of the CAR Guideline). Cash on deposit at a parent bank should be treated the same as if it were at a third party bank. In particular, the reporting institution should ensure all the eligibility requirements for recognition of collateral are met, including but not limited to paragraph 120 to 128. Institutions are also reminded that common law rights of set off do not establish legal certainty pursuant paragraph 118. This is especially so in the case of a subsidiary as lender and parent as issuer of the pledged deposit.
A: It is up to each institution to determine where Pillar 3 disclosure will be made. OSFI's Advisory on Pillar 3 allows flexibility in location. As per paragraph 814 of the Basel II Framework, banks may rely on accounting disclosures to fulfill the Pillar 3 requirements. For those disclosures that are not mandatory under accounting or other requirements, OSFI will allow institutions discretion on the location of the Pillar 3 disclosures (e.g., annual report, quarterly report, Web site, etc.).
A: OSFI expects a foreign bank subsidiary to review the Pillar 3 requirements and determine the relevant requirements for its institution. This should take into account market expectations for disclosure by the subsidiary as well as the disclosures made by the parent and their relevance to the subsidiary's operations in Canada. The complexity and size of the operations in Canada should also be considered. Once an institution has conducted this review and determined the relevant disclosure requirements, it should provide OSFI with a proposal for an exemption.
A: Only IRB institutions are required to complete the Pillar 3 roadmap and submit this information to OSFI. Other institutions may use this roadmap when assessing their compliance with the Pillar 3 requirements. However, there is no requirement for non-IRB institutions to submit the roadmap to OSFI.
A: The institution is expected to remain in continuous compliance. Each institution should determine its capital position in a manner appropriate to the nature, size and complexity of the institution, and consistent with the frequency with which it manages its portfolios/businesses.
A: This deduction relates to OSFI's Capital Advisory "Regulatory Capital Treatment of Certain Significant Items for Basel 1 under the New Financial Instruments Accounting
Standards" (published 2006-09-29) and these capital decisions have been carried forward to the Basel II CAR Guideline. Also, please refer to OSFI's Accounting Guideline D-10 "Accounting for Financial Instruments Designated as Fair Value Option" (published 06/22/06) which provides additional guidance on the use of the option.
If the fair value of a bank's deposits, debentures or other liabilities changes as a result of the bank's own credit risk, the resulting gain (or loss) must be deducted from (included in) regulatory capital on an accumulated after tax basis. For example, if a bank has a rating downgrade, the fair value of debentures accounted for under the fair value option may decrease resulting in a fair value gain reported in income. Under OSFI's CAR Guideline, these gains must be deducted from capital.
The responses contained herein do not negate the need for entities with questions related to a particular set of circumstances to contact their Relationship Manager (or whomever is designated) to provide additional detail in order to obtain guidance from OSFI in respect of a particular situation.
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