Office of the Superintendent of Financial Institutions
OSFI continues to actively monitor the evolving situation with COVID-19 and has been in frequent contact with deposit-taking institutions (DTIs) to assess their operational capacity and actions to address the current environment. As a result of these ongoing discussions, and further to the actions communicated in its March 27
letter, OSFI is announcing continued regulatory flexibility measures to support COVID-19 efforts while promoting financial resilience and stability.
Today, OSFI is outlining further adjustments to existing capital requirements for DTIs to ensure they are fit for purpose under the current extraordinary circumstances. In addition, for those items that are temporary in nature, OSFI will provide guidance on the unwinding of the accommodations at the appropriate time.
OSFI supports the efforts of the Basel Committee on Banking Supervision (BCBS) to provide additional operational capacity for banks and supervisors to respond to the immediate financial stability priorities. The BCBS recently issued clarification related to expected credit loss accounting and margin requirements for non-centrally cleared derivatives (link). OSFI has assessed these measures and has outlined below how these will be implemented domestically to ensure they are fit for purpose in the Canadian context.
OSFI will continue to engage DTIs on further developments and potential changes over the coming weeks. Institutions should be proactive in informing their OSFI Lead Supervisor of any financial or operational challenges they encounter as a result of COVID-19. Where further clarifications to supervisory or regulatory expectations are required, institutions and other stakeholders will be notified in a timely manner.
To facilitate DTIs’ ability to provide credit during these extraordinary circumstances, DTIs can temporarily exclude the following exposures from the leverage ratio exposure measure:
DTIs that use a primary dealer to access Bank of Canada asset purchase programs, and which do not have a settlement account at the Bank of Canada, are permitted to exclude the proceeds of the sale of securities into the Bank of Canada asset purchase programs from their leverage ratio exposure measure.
This treatment is effective immediately and will remain in place until April 30, 2021. Capital freed up through this measure should not be distributed (e.g., as dividends or bonus payments) but should be used to support lending and financial intermediation activities.
OSFI’s Capital Adequacy Requirements (CAR) Guideline, section 1.9, sets out the requirements for the capital floor which applies to institutions using the Internal Ratings Based (IRB) approach to credit risk. To support DTIs’ ability to continue to provide lending in the current environment, OSFI is lowering the floor factor from 75% to 70%, effective immediately. The floor factor of 70% is expected to stay in place until the domestic implementation of the Basel III capital floor in Q1 2023. The 70% level ensures that the floor continues to protect against model risk while maintaining the risk sensitivity of the capital framework for DTIs subject to the IRB approach.
On March 27, 2020, OSFI introduced transitional arrangements for expected credit loss (ECL) provisioning. At this time, OSFI does not plan to adjust the ECL capital treatment outlined in that letter. Although the BCBS is allowing jurisdictions the option of applying a 100% add-back of allowances to Common Equity Tier 1 (CET1) capital, OSFI is of the view that a maximum add-back of 70% is appropriate. The three-year transition will allow DTIs the ability to phase-in the impact of increased ECL allowances in CET1 capital while also acknowledging that these provisions are being taken. Additional details on the ECL capital treatment and regulatory reporting can be found
In line with the BCBS and IOSCO decision, OSFI is extending the deadline for the implementation of the final two phases of the initial margin requirements for non-centrally cleared derivatives outlined in OSFI’s Guideline E-22, by one year. With this extension, the final implementation phase will take place on September 1, 2022, at which point covered entities with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than CAD 12 billion will be subject to the requirements. As an intermediate step, from September 1, 2021 covered entities with an AANA of non-centrally cleared derivatives greater than CAD 75 billion will be subject to the requirements.
OSFI has published a
revised version of Guideline E-22
Margin Requirements for non-centrally cleared derivatives to reflect this revision. The revised publication does not include any other changes to Guideline E-22.