OSFI Consults on Applying Proportionality to Pillar 1 Rules in Canada
OSFI published a discussion paper seeks input on possible tailoring of the capital and liquidity requirements for small and medium-size deposit-taking institutions. The discussion paper outlines proposals for the segmentation of small and medium-size banks and the application of more tailored capital and liquidity requirements. Comment period on the consultation ends on September 27, 2019. In this phase, which is phase 1, focus is on the Pillar 1 minimum requirements. Subsequent phases of this exercise will focus on the Pillar 2 (prudential and risk management expectations) and Pillar 3 (public disclosure) requirements, which will be the subject of future consultations.
The discussion paper provides a summary of the four categories of small and medium-size deposit-taking institutions, including the criteria for segmentation and characteristics of institutions that will fall into each category. Pillar 1 requirements, which the consultation addresses, include the Capital Adequacy Requirements Guideline, the Leverage Requirements Guideline, and the Liquidity Adequacy Requirements Guideline. These guidelines are more rules-based in nature, which allows comparability and ensures consistent application across deposit-taking institutions. However, given the varying nature and complexity of deposit-taking institutions, the ratios produced by these requirements (for example, risk-based capital ratios, leverage ratio, liquidity coverage ratio) may not be the best measure of the risks faced by all small and medium-size institutions. To address this concern, OSFI is assessing how the existing capital and liquidity requirements can be modified for some small and medium-size institutions and is exploring alternative measures to assess the adequacy of capital and liquidity.
The current frameworks already incorporate some simpler options for smaller, less complex institutions (for example, flat risk-weights that can be applied to determine the credit risk capital held against certain assets). However, there may be a need to develop additional, simpler approaches for use by smaller or less risky institutions. In addition, the standardized approaches may not be sufficiently risk-sensitive to capture the risks associated with exposures in certain asset classes (for example, real estate). In these instances, OSFI will look to develop more risk-sensitive approaches that can be used to better capture the risk to which the small and medium-size institutions are exposed. Part of the work to assess the Pillar 1 requirements for small and medium-size deposit-taking institutions will involve the assessment of the current regulatory reporting regime, including the content and frequency of regulatory reporting.
This initiative, which is one of the key priorities identified in the Strategic Plan 2019–2022 of OSFI, will explore revisions to the capital and liquidity frameworks to better reflect the size, nature, complexity, and business activities of small and medium-size deposit-taking institutions. As new capital and liquidity standards are developed internationally and implemented domestically, OSFI is focused on ensuring that its capital and liquidity regime remains appropriate for these smaller, less complex organizations.
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Comment Due Date: September 27, 2019
Keywords: Americas, Canada, Banking, Basel III, Proportionality, Reporting, Pillar 1, Regulatory Capital, LCR, Leverage Ratio, OSFI
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