Document Properties
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Type of Publication: Letter
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Date: March 11, 2021
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To:
- Banks
- Bank Holding Companies
- Federally Regulated Trust and Loan Companies
OSFI is releasing today, for public consultation, revisions to the following guidance:
- Capital Adequacy Requirements (CAR) Guideline;
- Leverage Requirements (LR) Guideline; and
- Liquidity Adequacy Requirements (LAR) Guideline (together, “the Guidelines”).
Capital, Leverage and Liquidity Requirements
In July 2018, OSFI issued a
discussion paper which set forth its proposed policy direction for the implementation of the final Basel III reforms in Canada. Within the paper, OSFI noted its support for the changes proposed by the Basel Committee on Banking Supervision (BCBS), while outlining its intent to make adjustments to the package to reflect the Canadian market. Consistent with its current approach to developing domestic guidance, OSFI noted that its implementation of the Basel III reforms would be guided by the following key principles:
- The final Basel III reforms will be used as a starting point, although modifications may be made to take into account the unique characteristics of the Canadian market;
- The changes to the domestic capital framework should help to improve the risk sensitivity of the capital rules and thereby provide the right incentive structures to deposit-taking institutions (DTIs); and
- The revisions to the domestic capital framework should aim to promote the safety and soundness of DTIs while taking into consideration level playing field and competitiveness issues.
Accordingly, the proposed revisions to the CAR and LR Guidelines reflect OSFI’s domestic implementation of the final Basel III reforms as set out in the consolidated Basel Framework published by the BCBS. In addition, proposed revisions to these guidelines, as well as those proposed to the LAR Guideline, include changes to reflect specific capital and liquidity requirements applicable to small and medium sized deposit-taking institutions (SMSBs). These changes align to the draft new
SMSB Capital and Liquidity Requirements Guideline (the SMSB Capital and Liquidity Guideline) that is also being released today for public consultation.
Pillar 3 Requirements
Concurrent with this consultation, OSFI is consulting on proposed changes to the
Pillar 3 Disclosure Guideline applicable to Domestic Systemically Important Banks (D-SIBs). These enhanced disclosure requirements incorporate revisions to the Guidelines to support transparency and promote market discipline. For SMSBs, OSFI has included consultative questions for SMSB stakeholders in the Annex to this letter. Feedback received from stakeholders will be used to develop OSFI’s future Pillar 3 Disclosure Guideline for SMSBs.
Quantitative Impact Study
To assess potential impacts of certain aspects of the proposed changes to the Guidelines on DTIs’ regulatory ratios, OSFI will be undertaking a domestic quantitative impact study (D-QIS). The D-QIS template and instructions will be issued to all DTIs shortly.
Regulatory Returns
OSFI will undertake public consultations on corresponding changes to the related regulatory returns separately in 2021 and 2022.
Overview of Major Changes
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CAR Guideline
The primary changes that have been incorporated in the consultative version of the CAR Guideline include:
- Clarification of OSFI’s supervisory capital targets for DTIs, including interactions with buffers (Chapter 1);
- The implementation of a 72.5% Basel III output floor to be phased in over three years commencing in fiscal Q1-2023 (Chapter 1);
- The introduction of new deductions from Common Equity Tier 1 (CET1) capital for (a) certain exposures formerly subject to a 1250% risk-weight, (b) reverse mortgages with loan-to-value ratios greater than 80%, and (c) capitalized premiums on mortgage portfolio insurance (Chapter 2);
- The deletion of the transitioning arrangements for capital instruments that were deemed non-qualifying upon implementation of Basel III in fiscal Q1-2013 (Chapter 2);
- The introduction of new operational risk capital rules through domestic implementation of the Basel III Standardized Approach for operational risk and a new Simplified Standardized Approach available for SMSBs (Chapter 3);
- The reduction of credit risk capital requirements for certain qualifying revolving retail exposures (Chapters 4 and 5);
- The incorporation of updates to the capital treatment of privately insured mortgages (Chapters 4 and 5);
- The elimination of the 1.06 Internal Ratings Based (IRB) scaling factor initially implemented as part of the transition from Basel I to Basel II (Chapter 5); and
- The implementation of new market risk capital rules, consistent with the Basel Committee’s Fundamental Review of the Trading Book (FRTB), as well as a a minimum coverage threshold for use of the Internal Model Approach (IMA) for market risk (Chapter 9).
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LR Guideline
The primary changes that have been incorporated in the consultative version of the LR Guideline include:
- The application of a leverage ratio buffer to D-SIBs; and
- Other changes to the leverage requirements (e.g., the treatment of securities financing transactions, the treatment of off-balance sheet items) to align with revisions to the CAR Guideline.
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LAR Guideline
The primary changes that have been incorporated in the consultative version of the LAR Guideline include:
- Enhancements to Net Cumulative Cash Flow (NCCF) requirements to improve the recognition of cash flows related to asset growth (e.g., commitments) and operational expenses; and
- A reduction of the time to report NCCF to OSFI for non-direct clearers and clarifications of the time to report NCCF to OSFI for all institutions during periods of stress.
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SMSB Capital and Liquidity Guideline
In July 2019, OSFI released a Discussion Paper:
Advancing Proportionality: Tailoring Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions which described its initiative to develop more tailored requirements that take into account the unique nature of these institutions. In January 2020, OSFI released a
Consultative Document that provided an update regarding the development of these Pillar 1 SMSB capital and liquidity requirements.
OSFI took into consideration stakeholder feedback related to the July 2019 Discussion Paper and January 2020 Consultative Document in developing the SMSB Capital and Liquidity Guideline. The new guideline is a reference tool for stakeholders to help them understand which parts of the CAR, LR and LAR Guidelines are applicable to SMSBs. As such, the SMSB Capital and Liquidity Guideline should be read in conjunction with the relevant portions of the CAR, LR and LAR Guidelines.
Key features of the SMSB Capital and Liquidity Guideline include:
- Criteria to segment SMSBs into different categories for purposes of determining capital and liquidity requirements;
- Separate sections for each category of SMSBs that describe the capital and liquidity requirements that are applicable including references to the relevant sections of CAR, LR and LAR Guidelines; and
- Increased use of flow charts and tables to explain SMSB capital and liquidity requirements for stakeholders and to facilitate review of the document.
The SMSB Capital and Liquidity Guideline along with the CAR, LR and LAR Guidelines also reflect changes to the capital and liquidity requirements for SMSBs that build upon the proposals included in the July 2019 Discussion Paper and January 2020 Consultative Document. Key changes include:
- The option for Category I and II SMSBs to use a Simplified Standardized Approach to calculate credit risk capital for certain asset classes based on a materiality threshold;
- The introduction of a Simplified Standardized Approach for operational risk capital;
- The introduction of a Simplified Risk Based Capital Ratio for Category III SMSBs that replaces the current risk-based capital ratio and the leverage ratio;
- The introduction of an Operating Cash Flow Statement that will be the sole measure of liquidity adequacy for Category III SMSBs;
- The introduction of a Streamlined NCCF for Category II SMSBs that is a simpler version than the Comprehensive NCCF applicable to Category I SMSBs; and
- Applicability of the Net Stable Funding Ratio to Category I SMSBs that significantly rely on wholesale funding.
Implementation Timelines
Except as noted below, the revised Guidelines as well as the SMSB Capital and Liquidity Guideline will be implemented from the beginning of fiscal Q1-2023. The revised CAR Guideline chapters relating to CVA risk and market risk (i.e. Chapter 8 and Chapter 9) will come into effect in fiscal Q1-2024.
OSFI also plans to revise and update its implementation note on
Data Maintenance at TSA and AMA institutions in light of the updated operational risk framework included in the CAR Guideline. We plan to engage in further consultations later this year with respect to any changes in our data maintenance expectations for institutions using the Standardized Approach for operational risk.
Request for Feedback
Specific feedback is requested in respect of the questions outlined in the Annex. Notwithstanding this, OSFI welcomes questions and comments on all aspects of the changes to the Guidelines as well as the draft SMSB Capital and Liquidity Guideline. Questions and comments on these guidelines should be sent to OSFI by email at
Consultations@osfi-bsif.gc.ca by no later than June 4, 2021. Questions and comments related to the Pillar 3 Disclosure Guideline applicable to D-SIBs should be sent to OSFI by email at
Consultations@osfi-bsif.gc.ca by no later than July 2, 2021. A non-attributed summary of industry comments along with OSFI’s responses will be posted on OSFI’s website upon publication of final guidance.
Yours truly,
Ben Gully
Assistant Superintendent
Regulation Sector
ANNEX: Targeted Questions
In conjunction with the public consultations, OSFI is seeking specific feedback on the following questions for each guideline.
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CAR Guideline
- Are there specific requirements within the CAR Guideline revisions that you foresee as posing a significant challenge to timely implementation? If so, please explain.
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Leverage Requirements Guideline
- Are there specific requirements within the LR Guideline revisions that you foresee as posing a significant challenge to timely implementation? If so, please explain.
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LAR Guideline
- Are there specific requirements within the LAR Guideline revisions that you foresee as posing a significant challenge to timely implementation? If so, please explain.
- Please assess/estimate the impact of Chapter 4 revisions on your NCCF survival horizon. Impact assessments will be taken into consideration when OSFI reviews institution-specific NCCF requirements, as described in Chapter 4, paragraph 8, prior to the implementation of the revised NCCF guidance in Q1-2023.
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SMSB Capital and Liquidity Guideline
In its January 2020
Consultative DocumentSMSB Capital and Liquidity Requirements, OSFI noted that its review of the capital and liquidity frameworks aimed to strike an appropriate balance in relation to the following principles which are guiding OSFI's review of the capital and liquidity frameworks for SMSBs.
- The capital and liquidity frameworks applied to SMSBs should reflect the nature, size, complexity and business activities of these institutions.
- Capital and liquidity requirements should contribute to the protection of depositors and creditors and allow institutions to compete effectively and take reasonable risks.
- The revisions to the frameworks should strike the right balance between improving the risk sensitivity of the requirements for SMSBs and reducing the complexity of the frameworks to make them more fit for purpose.
- Do you regard the proposals set forth in the SMSB Capital and Liquidity Guideline as achieving an appropriate balance amongst these principles?
- Do you believe the SMSB Capital and Liquidity Guideline is a useful reference tool for stakeholders to understand the capital and liquidity requirements that apply to SMSBs? Do you have any suggestions on how to improve the presentation and/or structure of the Guideline to enhance its usability?
- Does the SMSB Capital and Liquidity Guideline provide sufficient guidance related to the operationalization of key aspects of the SMSB capital and liquidity framework (e.g., the segmentation approach, the use of the Simplified Standardized Approach for credit risk capital)? If there are specific areas that could be improved, please explain.
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SMSB Pillar 3 Disclosure Guidance
The
Basel Framework Disclosure Requirements provide a number of tables and templates for internationally active banks (D-SIBs in Canada) to disclose. Taking into consideration the guiding principles set out in
OSFI’s Draft Pillar 3 Guideline for D-SIBs, OSFI aims to require SMSBs to disclose only those tables and templates that are fit for purpose given the applicable capital measures per OSFI’s
Draft SMSB Capital and Liquidity Requirements Guideline.
OSFI is seeking feedback from stakeholders on a proportional set of Pillar 3 disclosure requirements for SMSBs. The responses to the questions below will inform OSFI’s future Draft Pillar 3 Disclosure Guideline for SMSBs.
Questions for all stakeholders:
- For Category I, II and III SMSBs, if OSFI were to adopt Pillar 3 disclosures from the
Basel Framework Disclosure Requirements, which disclosures do you perceive to be less meaningful to users among the following risk categories:
- Credit risk
- Counterparty credit risk
- Securitisation
- Operational Risk
- Remuneration
- Comparison of modelled and standardised RWA (A-IRB approved SMSBs only)?
Please provide your rationale.
Questions for SMSBs:
- For Category I, II and III SMSBs, if OSFI were to adopt Pillar 3 disclosures from the
Basel Framework Disclosure Requirements, which disclosures would be particularly challenging to prepare among the following risk categories:
- Credit risk
- Counterparty credit risk
- Securitisation
- Operational Risk
- Remuneration
- Comparison of modelled and standardised RWA (A-IRB approved SMSBs only)?
Please provide your rationale.
- Could there be any unintended consequences if OSFI were to require all SMSBs (that are not subsidiaries of other DTIs regulated by OSFI) to include disclosure of their respective segmentation category (i.e. Category I, Category II, or Category III) as part of their Pillar 3 disclosures? Please explain.