OSFI Consults on Implementation of Final Basel III Reforms in Canada
OSFI launched an industry consultation to introduce the latest and final round of Basel III reforms into its guidelines on capital adequacy requirements, leverage requirements, liquidity adequacy requirements, and Pillar 3 disclosure guidelines for banks. Along with these updates, OSFI is proposing new guidelines on capital and liquidity frameworks for small and medium-size deposit-taking institutions (SMSBs). The comment period for these proposals expires on June 04, 2021, except comment period for the disclosure guidelines, which ends on July 02, 2021. OSFI will publish a summary of the consultation feedback with the release of the final guidance in late 2021.
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
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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
EBA Issues Erratum for Phase 2 Package of Reporting Framework 3.0
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
EBA Updates Lists of Entities for Use in Capital Calculations under SA
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
MAS Amends Notice on Related Party Transactions of Banks
MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.
ECB Amends Guideline on Euro Short-Term Rate
ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.
EBA Consults on Standards Related to FRTB-SA
EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).
PRA Proposes Rules Related to IRB Approach for Credit Risk
PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.
BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK
The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.
FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks
FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.
OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks
OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.
EU Amends CRR and Securitization Regulation in Response to Pandemic
To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).
