OSFI issued a letter to federally regulated deposit-taking institutions on the capital treatment of new loans to businesses through the Highly Affected Sectors Credit Availability Program (HASCAP). The government of Canada mandated the Business Development Bank of Canada (BDC) to set up the HASCAP loan guarantee program and work with eligible lenders to provide additional liquidity for Canadian businesses highly affected by the COVID-19 pandemic. OSFI expects federally regulated lenders to treat HASCAP loans as a sovereign exposure based on the BDC guarantee and to apply the relevant risk-weight under the Capital Adequacy Requirements Guideline of OSFI.
The OSFI letter is addressed to banks, bank holding companies, and federally regulated trust and loan companies. The letter specifies the following key points:
- The BDC guarantee can be recognized as a guarantee under the Capital Adequacy Requirements Guideline, as it meets the related operational requirements set out in paragraphs 75 and 76 of Chapter 5 of the Guideline.
- If there are currency or maturity mismatches, the amount of the guarantee recognized for capital purposes would need to be adjusted according to section 5.1.6 of the Capital Adequacy Requirements Guideline.
- Under the Standardized Approach to credit risk, the guaranteed loan would receive the risk-weight applicable to the government of Canada (0%), the guarantor.
- Under the Internal Ratings Based Approach to credit risk, the guaranteed loan would be treated with the Probability of Default substitution approach and/or the Loss Given Default adjustment approach as outlined in section 6.8.7 (ix) of the Capital Adequacy Requirements Guideline.
- In calculating the leverage ratio, the entire amount of the loan would need to be included in the exposure measure of the leverage ratio pursuant to the Leverage Requirements Guideline paragraph 12.
By announcing the capital treatment of this loan program, OSFI is providing timely direction for institutions, financial markets, and borrowers. These and other responsive regulatory adjustments, in addition to the ongoing supervisory vigilance, ensure that the OSFI guidance is appropriate for these extraordinary circumstances while remaining risk-focused and forward‑looking. OSFI will continue to look for ways to ensure its capital and liquidity requirements are fit for purpose during the pandemic.
Keywords: Americas, Canada, Banking, COVID-19, Regulatory Capital, CAR Guideline Leverage Requirements Guideline, Basel, Guarantee Scheme, Loan Guarantee, Credit Risk, OSFI
Previous ArticleHKMA Announces Success of Green Bond Offering from HKSAR
The European Banking Authority (EBA) published the final draft implementing technical standards on Pillar 3 disclosures on environmental, social, and governance (ESG) risks.
The European Banking Authority (EBA) proposed to update the guidelines on the data collection exercise on high earners and the remuneration benchmarking exercise under the Capital Requirements Directive (CRD).
The Network for Greening the Financial System (NGFS) announced the appointment of Mr. Ravi Menon, the Managing Director of the Monetary Authority of Singapore (MAS), as its new Chair for a two-year term.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules on related-party transactions and outsourcing risks.
The Office of the Superintendent of Financial Institutions (OSFI) published an update on the discussion paper that intended to engage federally regulated financial institutions and other interested stakeholders in a dialog with OSFI, to proactively enhance and align assurance expectations over key regulatory returns.
The European Commission (EC) published a report summarizing responses to the targeted consultation on the supervisory convergence and the single rulebook in the European Union (EU).
The Bank of International Settlements (BIS) announced successful test integration of wholesale central bank digital currency (CBDC) settlement with commercial banks, as part of the Project Helvetia.
The European Central Bank (ECB) published its opinion on a proposal for a regulation on European green bonds, following a request from the European Parliament.
The Advisory Scientific Committee (ASC) of the European Systemic Risk Board (ESRB) published a report that explores the expected impact of digitalization on provision of financial and banking services, and proposes policy measures to address the risks stemming from digitalization.
The Hong Kong Monetary Authority (HKMA) is consulting on the draft Financial Institutions (Resolution) Ordinance (Cap. 628), or FIRO, Code of Practice chapter on liquidity and funding in resolution, until March 14, 2022.