OSFI published a letter that provides additional information on supervisory expectations about capital management for deposit-taking institutions amid the COVID-19 pandemic. The letter clarifies expectations on the use of Pillar 2 capital buffers by deposit-taking institutions using the standardized approach to credit risk and outlines prudent capital management actions in the current environment. With respect to the frequently asked questions (FAQs) on COVID-19 measures, OSFI added clarifications on use of capital buffers and prudent capital management.
The current capital regime for deposit-taking institutions is multi-layered and includes minimum capital requirements, along with the Pillar 1 and Pillar 2 capital buffers. Pillar 1 capital buffers include a capital conservation buffer for all deposit-taking institutions and an additional surcharge of 1% of risk-weighted assets for domestic systemically important banks or D-SIBs. Pillar 2 capital buffers include institution-specific buffers and domestic stability buffer for domestic systemically important banks. OSFI clarifies that the ability to use Pillar 2 capital buffers in times of stress, like the current COVID-19 pandemic, applies to all deposit-taking institutions, including those using the standardized approach to credit risk. Deposit-taking institutions that plan to use Pillar 2 buffers by operating below their internal capital targets should discuss this with their designated Lead Supervisor. Additionally, OSFI expects small and medium-sized banks to be closely tracking their credit portfolios and reporting on developments to OSFI on a regular basis.
Within the FAQs, OSFI specifies that changes to the capital risk-weights under the standardized approach for credit risk as a result of the circumstances stemming from COVID-19 are not currently under consideration. As stated in its letter, OSFI expects all deposit-taking institutions, including those using the standardized approach to credit risk, to consider the appropriateness of their capital management actions in the current environment. This includes the following:
- In cases where deposit-taking institutions are using their capital buffers, they should use the capacity prudently and consider appropriate capital conservation actions. An institution should also have a plan for how it expects to manage its risks and restore capital.
- Deposit-taking institutions should consider stress testing information (including plausible future adverse scenarios) as part of the capital management decision-making process.
- Deposit-taking institutions must ensure that they undertake prudent capital management actions to protect depositors and other creditors while taking reasonable risks.
Keywords: Americas, Canada, Banking, COVID-19, Credit Risk, Pillar 1, Pillar 2, Standardized Approach, Regulatory Capital, FAQ, OSFI
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleUS Agencies Ease Requirement for Market Risk Amid COVID Volatility
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.
The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.
The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).
The Monetary Authority of Singapore (MAS) set out the Financial Services Industry Transformation Map 2025 and, in collaboration with the SGX Group, launched ESGenome.
The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.
The International Organization of Securities Commissions (IOSCO) welcomed the work of the international audit and assurance standard setters—the International Auditing and Assurance Standards Board (IAASB)
The Bank of England (BoE) published a Statistical Notice (2022/18), which informs that due to the Bank Holiday granted for Her Majesty Queen Elizabeth II’s State Funeral on Monday September 19, 2022.
The French Prudential Control and Resolution Authority (ACPR) announced that the European Banking Authority (EBA) has updated its filing rules and the implementation dates for certain modules of the EBA reporting framework 3.2.
The European Central Bank (ECB) published a paper that examines how credit rating agencies accepted by the Eurosystem, as part of the Eurosystem Credit Assessment Framework (ECAF)
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility (CLF) for authorized deposit-taking entities to ~USD 33 billion on September 01, 2022.