Document Properties
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Type of Publication: Letter
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Date: March 30, 2020
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To:
- Banks
- Bank Holding Companies
- Federally Regulated Trust and Loan Companies
On March 27, 2020, the Government of Canada announced that it is making additional investments to support Canadian businesses dealing with the economic impacts of COVID-19. This document sets out how these exposures should be treated by deposit-taking institutions (DTIs) under the Capital Adequacy Requirements (CAR) and Leverage Requirements (LR) Guidelines.
I. Canada Emergency Business Account
To ensure that small businesses have access to the capital they need to see them through the current challenges, the Government of Canada announced the launch of the new Canada Emergency Business Account.
As these exposures are funded by the Government of Canada, DTIs that acquire exposures as part of the Canada Emergency Business Account program can exclude these exposures from the risk-based capital ratios calculated under the CAR Guideline and from the leverage ratio calculated under the LR Guideline.
II. Export Development Canada (EDC) Guarantee
To support the operations of small and medium-sized enterprises (SMEs), EDC will guarantee new operating credit and cash flow term loans that financial institutions extend to SMEs.
The guarantee provided by EDC to the DTI can be recognized under the CAR Guideline as a guarantee as it meets the related operational requirements set out in paragraphs 75 and 76 of Chapter 5 of the CAR Guideline. The guaranteed portion of the loan can be treated as an exposure to the Government of Canada (reflecting that EDC is an agent of the crown). The remaining portion of the loan would be treated as an exposure to the borrower.
If there are currency mismatches (i.e., between the currency of the EDC guarantee and that of the loan) or maturity mismatches (i.e., between the term of the EDC guarantee and that of the loan), the amount of the guarantee recognized for capital purposes would need to be adjusted according to section 5.1.6 (iii-iv) of the CAR Guideline.
Under the Standardized Approach to credit risk, the guaranteed portion of the loan would receive the risk weight applicable to Government of Canada (i.e., 0%) and the remainder of the loan would be treated as an exposure to the borrower. Under the Internal Ratings Based Approach to credit risk, the guaranteed portion would be treated as an exposure to the Government of Canada. This would be reflected using the Probability of Default substitution approach and/or the Loss Given Default adjustment approach as outlined in the section 6.8.7 (ix) of the CAR Guideline. The remainder of the loan would be treated as an exposure to the borrower.
In calculating the leverage ratio, the entire amount of the loan would be included in the exposure measure of the leverage ratio.
III. Business Development Bank of Canada (BDC) Co-lending Program
To provide additional liquidity support for Canadian businesses, the Government of Canada announced a new co-lending program for SMEs. This co-lending program will bring the BDC together with financial institutions to co-lend term loans to SMEs for their operational cash flow requirements.
Under this co-lending program with BDC, DTIs would hold a portion of the loan that is made to the borrower. Under the Standardized Approach to credit risk, the portion of the loan made by the DTI would receive the risk weight applicable to the borrower. Under the Internal Ratings Based Approach to credit risk, the portion of the loan made by the DTI would be treated as an exposure to the borrower.
In calculating the leverage ratio, the portion of the loan made by the DTI to the borrower would be included in the exposure measure of the leverage ratio. The BDC portion of the loan would be excluded from the leverage ratio.
Questions concerning the capital treatment for exposures acquired through the new Government of Canada programs should be addressed to Catherine Girouard in OSFI's Capital Division by email at
Catherine.Girouard@osfi-bsif.gc.ca.
Yours truly,
Ben Gully
Assistant Superintendent
Regulation Sector