January 12, 2018

OSFI revised the capital floor that will set a minimum on the required regulatory capital for banks using internal models, relative to the Basel II standardized approach. The capital floor will be implemented effective second quarter of 2018, with the floor factor transitioned in over three quarters. The floor factor will be set at 70.0% in the second quarter of 2018, increasing to 72.5% in the third and 75% in the fourth quarter of 2018. The capital floor will be further updated over time, as changes are made to the OSFI capital framework.

As a BCBS member, OSFI participated in the development and finalization of the Basel III reforms, which include replacement of the existing capital floor with a more robust, risk-sensitive output floor, based on the Basel III standardized approaches. Given that the proposed implementation of the Basel III output floor and revised standardized approaches is not expected to begin before 2022, this interim step will improve risk-sensitivity while ensuring the objectives of the capital floor continue to be met. The detailed description of the revised capital floor is mentioned in Annex 1. The revised floor must be reported in the Basel Capital Adequacy Reporting (BCAR) regulatory return as of second quarter of 2018, according to the instructions provided in Annex 2. Changes will be made to the BCAR return to reflect the revised floor for the first quarter of 2019. 

The revisions apply to banks, bank holding companies, federally regulated trust and loan companies, and cooperative retail associations. Capital floors and their associated disclosure requirements support the credibility and comparability of risk-weighted capital calculations. 

 

Related Link: OSFI Letter

Keywords: Americas Canada, Banking, Basel III, Capital Floor, Regulatory Capital, BCAR, CAR, Credit Risk, BCBS, OSFI

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