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
ECB published Guideline 2021/975, which amends Guideline ECB/2014/31, on the additional temporary measures relating to Eurosystem refinancing operations and eligibility of collateral.
EIOPA published a report, from the Consultative Expert Group on Digital Ethics, that sets out artificial intelligence governance principles for an ethical and trustworthy artificial intelligence in the insurance sector in EU.
HKMA published the seventh and final issue of the Regtech Watch series, which outlines the three-year roadmap of HKMA to integrate supervisory technology, or suptech, into its processes.
EC launched a targeted consultation to improve transparency and efficiency in the secondary markets for nonperforming loans (NPLs).
BIS, Danmarks Nationalbank, Central Bank of Iceland, Norges Bank, and Sveriges Riksbank launched an Innovation Hub in Stockholm, making this the fifth BIS Innovation Hub Center to be opened in the past two years.
FDITECH, the technology lab of FDIC, announced a tech sprint that is designed to explore new technologies and techniques that would help expand the capabilities of community banks to meet the needs of unbanked individuals and households.
EC released the EU Taxonomy Compass, which visually represents the contents of the EU Taxonomy starting with the EU Taxonomy Climate Delegated Act.
FDIC is seeking comments on a rule to amend the interagency guidelines for real estate lending policies—also known as the Real Estate Lending Standards.
EIOPA published its annual report, which sets out the work done in 2020 and indicates the planned work areas for the coming months.
The ESRB paper that presents an analytical framework that assesses and quantifies the potential impact of a bank failure on the real economy through the lending function.