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
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