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January 09, 2018

Carolyn Rogers of OSFI discussed the lessons of Basel III and the path ahead for Canada while addressing the audience at the 2018 RBC Capital Markets Canadian Bank CEO Conference in Toronto. She summarized the lessons learned from finalizing Basel III and explained how OSFI will take these lessons and the final reforms forward.

The first lesson, according to her, is that supervision is critical to any strong regulatory regime; rules only get you so far. The second lesson is that delays will eventually catch up to you while the third lesson is that all standards have their limits and their usefulness can deteriorate over time; domestic context and ongoing evaluation is critical. She added that OSFI will take these lessons forward by making the capital buffers more usable. To date, OSFI has not activated the Countercyclical Capital Buffer (CCyB) in Canada. However, this year, the plan is to make adjustments to the capital regime to increase transparency and this may take the form of a modified version of CCyB, or simply greater transparency on Pillar 2 buffers. OSFI is still considering options and is consulting with stakeholders. Its objective is not to add capital but rather to increase the likelihood that the capital that is already there will be drawn on as intended in case of a stressed event in the future.

Ms. Rogers also discussed the need to update standards and highlighted the first step being taken in implementing the final chapter of Basel III in Canada. That step is to replace the current capital output floor with the more risk-sensitive Basel II floor, calibrated at 75%. Details of the changes will be published on the OSFI website shortly; the transition will begin next quarter and end in the fourth quarter of this year. The OSFI focus will be on mapping the rest of the transition plan to bring the final set of Basel III reforms into Canada. She added that the following can be expected from OSFI in the year ahead:

  • Changes to the transparency of the capital regime focused on improving the usability of capital buffers
  • An updated, more risk-sensitive capital output floor that will bridge to the Basel III output floor
  • A start to consultations on the final round of Basel III reforms, guided by lessons learned about building a capital regime that is credible and contributes to the safety and soundness of Canadian banks

Related Link: Speech

Keywords: Americas, Canada, Banking, Basel III, Output Floor, CCyB, Pillar 2, OSFI

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