Leverage Requirements (LR) Guideline

Document Properties

  • Type of Publication: Guideline Impact Analysis Statement
  • Date: October 2014
  • Audiences: Banks / BHC / T&L / Retail Associations

I. Background

In January 2014, the Basel Committee on Banking Supervision released Basel III leverage ratio framework and disclosure requirements. Under the Basel leverage ratio framework, public disclosure of the leverage ratio begins on January 1, 2015.

As a member of the BCBS, OSFI intends to adopt the Basel requirements as part of its domestic requirements for banks, bank holding companies, federally regulated trust and loan companies, and cooperative retail associations in Canada. Given public disclosure of the leverage ratio begins in 2015, OSFI has decided to replace the existing Assets to Capital Multiple (ACM) with the Basel leverage ratio beginning in Q1 2015. Adoption of the Basel leverage requirements in 2015 will prevent institutions from having to calculate and publicly disclose two measures of leverage.

II. Problem Identification

OSFI does not have a guideline that reflects the aforementioned BCBS leverage requirements.  

III. Objectives

OSFI’s objective is to issue comprehensive and clear guidance to institutions outlining the leverage requirements that will take effect in the first quarter of fiscal 2015.

IV. Identification and Assessment of Options

Option 1 – Reflect the BCBS publications in formal OSFI guidance

This option entails the creation of a guideline that would contain the leverage requirements that OSFI will use to assess the capital adequacy of an institution.  In order to reference material contained in the aforementioned BCBS publication, the BCBS paragraph numbers and document that are associated with text drawn from these sources would be indicated in square brackets at the end of each paragraph.    

While this option entails moderate up-front costs to OSFI to produce the guideline, it will provide long term benefits to users of the guideline as it comprehensively outlines OSFI’s expectations and areas of interpretation related to the leverage requirements that OSFI will utilise to assess the capital adequacy of an institution.

Option 2 – Make no changes – rely only on BCBS publications to communicate requirements

The advantage of this option is that OSFI would not have to devote resources to producing its own guidance.  However, institutions would be left without comprehensive guidance on OSFI’s application of and expectations surrounding the leverage requirements. This is inefficient for both institutions and OSFI would be required to devote resources on an ongoing basis in order to respond to enquiries from the industry related to implementation issues that have been addressed in the guideline.

V. Recommendation

OSFI is of the view that a comprehensive domestic leverage requirements guideline is the most appropriate option for ensuring that institutions understand and apply the guidance correctly.  It is recommended that the guideline be created to incorporate the BCBS leverage requirement guidance and to convey OSFI’s expectations around the application of these requirements in Canada.

VI. Consultations

In July 2014, the guideline was published in draft form on the OSFI website.  No comments were received on the draft guideline.

VII. Implementation

The guideline will be effective the first quarter of fiscal 2015.