OSFI Consults on Implementation of Final Basel III Reforms in Canada

The final set of Basel III reforms seeks to enhance the way institutions calculate risk-weighted assets and improve the comparability and transparency of their capital ratios. The primary changes that have been incorporated in the consultative version of the Capital Adequacy Requirements Guideline include:

• Clarification of supervisory capital targets for deposit-taking institutions, including interactions with buffers
• Implementation of a 72.5% Basel III output floor to be phased in over three years commencing in first quarter of fiscal 2023
• Introduction of new deductions from common equity tier 1 capital for certain exposures, reverse mortgages with loan-to-value ratios greater than 80%, and capitalized premiums on mortgage portfolio insurance
• Deletion of the transitioning arrangements for capital instruments that were deemed non-qualifying upon implementation of Basel III in first quarter of fiscal 2013
• Introduction of new operational risk capital rules through domestic implementation of the Basel III standardized approach for operational risk and a new simplified standardized approach available for SMSBs
• Reduction of credit risk capital requirements for certain qualifying revolving retail exposures
• Incorporation of updates to the capital treatment of privately insured mortgages
• Elimination of the internal ratings-based scaling factor of 1.06, initially implemented as part of the transition from Basel I to Basel II
• Implementation of new market risk capital rules, consistent with the Fundamental Review of the Trading Book as well as a a minimum coverage threshold for use of the internal models approach for market risk

With respect to changes to the Leverage Requirements Guideline, OSFI is consulting on the application of a leverage ratio buffer to domestic systemically important banks, in addition to other changes to the leverage requirements to align with revisions to the Capital Adequacy Requirements Guideline. Regarding the Liquidity Adequacy Requirements Guideline, OSFI is consulting on enhancements to the Net Cumulative Cash Flow (NCCF) requirements to improve the recognition of cash flows related to asset growth and operational expenses. OSFI is also proposing a reduction of the time to report NCCF to OSFI for non-direct clearers and clarifications of the time to report NCCF to OSFI for all institutions during periods of stress. With respect to the changes to Pillar 3 Disclosure Guideline, OSFI is proposing the implementation of Phases II and III of BCBS Pillar 3 disclosures by Canadian domestic systemically important banks. In addition to existing Pillar 3 disclosure requirements, domestic systemically important banks are expected to disclose eight updated tables and templates relating to credit risk starting from January 31, 2023.

For the reporting period ending October 31, 2023, domestic systemically important banks are expected to disclose 15 new tables and templates from Phases II and III of the BCBS Pillar 3 disclosure requirements. The Draft Pillar 3 Disclosure Guideline lists the disclosures required from the domestic systemically important banks while OSFI will include the detailed tables and templates in the final guideline. The draft new SMSB Capital and Liquidity Requirements Guideline is a reference tool for stakeholders to help them understand which parts of the capital adequacy requirements, leverage requirements, and liquidity adequacy requirements guidelines are applicable to SMSBs. Thus, the SMSB Capital and Liquidity Guideline should be read in conjunction with the relevant portions of the capital adequacy requirements, leverage requirements, and liquidity adequacy requirements guidelines. The proposed SMSB Capital and Liquidity Guideline reflects the following changes to the capital and liquidity requirements for SMSBs:

• Option for Category I and II SMSBs to use a simplified standardized approach to calculate credit risk capital for certain asset classes based on a materiality threshold
• Introduction of a simplified standardized approach for operational risk capital
• Introduction of a simplified risk-based capital ratio for Category III SMSBs to replace the current risk-based capital ratio and the leverage ratio
• Introduction of an Operating Cash Flow Statement, which will be the sole measure of liquidity adequacy for Category III SMSBs
• Applicability of the net stable funding ratio to Category I SMSBs that significantly rely on wholesale funding

The revised guidelines, including the SMSB Capital and Liquidity Guideline, are expected to be implemented from the beginning of first quarter of fiscal 2023, with certain exceptions. Chapters of the revised Capital Adequacy Requirements Guideline that relate to credit valuation adjustment (CVA) risk and market risk are expected to come into effect in the first quarter of fiscal 2024. OSFI also plans to revise and update its implementation note on Data Maintenance at Standardized Approach or the Advanced Measurement Approach institutions in light of the updated operational risk framework included in the Capital Adequacy Requirements Guideline. OSFI plans to engage in further consultations later this year with respect to any changes in the data maintenance expectations for institutions using the standardized approach for operational risk.

Related Links

• News Release and Draft Guidelines
• Letter on Consultation
• Letter on Changes to Pillar 3 Guidelines

Comment Due Date: June 04, 2021/July 02, 2021

Expected Effective Date: Q1 of 2023 and 2024

Keywords: Americas, Canada, Banking, Basel, Regulatory Capital, Credit Risk, Market Risk, Operational Risk, Pillar 3, Output Floor, CVA Risk, Disclosures, Reporting, Pillar 1, OSFI