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    OSFI Consults on Applying Proportionality to Pillar 1 Regime for Banks

    January 17, 2020

    OSFI published the second consultation on the application of proportionality to Pillar 1 rules in Canada. The consultative document summarizes stakeholder feedback on the July 2019 discussion paper and covers proposals related to the capital and liquidity requirements applicable to small and medium-size deposit-taking institutions. The consultation period ends on March 06, 2020. The feedback received will inform the development of draft guidance, which will be published in late Spring of 2020.

    The consultative document explores revisions to the capital and liquidity frameworks for small and medium-size deposit-taking institutions to better reflect the size, nature, complexity, and business activities of these institutions. In the first consultation (July 2019 Discussion Paper), OSFI had proposed to segment the small and medium-size entities into distinct categories that would allow for better tailoring of the Pillar 1 capital and liquidity requirements. The proposed segmentation was based on a combination of the following four qualitative and quantitative criteria:

    • The approach used to calculate Pillar 1 capital requirements for credit risk
    • The size of an institution's on-balance sheet assets
    • The amount of assets under administration/ assets under management
    • OSFI judgment

    Based on the feedback received to the first consultation, OSFI has proposed changes to the criteria for segmentation of categorizing small and medium-size deposit-taking institutions. In the second consultation, OSFI is proposing to merge Categories 1 and 2 of banks to reduce duplication and to reflect the similarities among these medium-size institutions. This new merged category will now be referred as Category I or "Medium-size Institutions." OSFI is also proposing to change the segmentation criteria for Category 3 and 4 institutions from total assets and assets under administration/assets under management to total loans. The minimum threshold would be set at $100 million in total loans and is based on an analysis of the dollar amount of loans held by small and medium size deposit-taking institutions where lending is a significant activity. Under this proposal, Category 3 would include small lending institutions whose total loans are greater than $100 million and total assets are less than $10 billion. Category 3 will now be referred as Category II or "Small Lenders". Category 4 institutions would consist of non-lending institutions that are primarily involved in fee-based activities such as trust and custody businesses and will be referred to as Category III or "Non-Lenders."

    OSFI is targeting the publication of a final set of rules by December 2020, with an effective implementation date in the first quarter of 2022. Also, future phases of this initiative, which relate to Pillar 2 and Pillar 3 capital and liquidity-related requirements, will be the subject of consultations later this year. In the late Spring of 2020, OSFI will also begin consultation with small and medium-size deposit-taking institutions regarding the content and frequency of regulatory reporting associated with Pillar 1 capital and liquidity requirements. OSFI plans to conduct targeted industry consultations with the institutions to whom these proposed requirements will apply. 

     

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    Comment Due Date: March 06, 2020

    Keywords: Americas, Canada, Banking, Proportionality, Pillar 1, Pillar 2, Pillar 3, Basel III, Regulatory Capital, Liquidity Risk, OSFI

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