May 23, 2019

OSFI is updating the covered bond limit calculation, which was last revised in December 2014. The updated covered bond ratio calculation will be effective from August 01, 2019 and is applicable for all deposit-taking institutions issuing covered bonds. Going forward, the total assets pledged by a deposit-taking institution for covered bonds must not, at any time, represent more than 5.5% of the on-balance-sheet assets of an issuer.

To improve simplicity of the covered bond limit calculation, OSFI is replacing the Assets to Capital Multiple (ACM) proxy of total assets with on-balance sheet assets as reported on the regulatory balance sheet return (M4). OSFI is also updating the numerator of the calculation to better reflect the amount of assets encumbered through covered bonds by capturing the overcollateralization associated with these instruments. By definition, this amount will always be higher than the notional amount of covered bonds issued.

The intent of these updates is to neither increase nor decrease the covered bond issuance capacity for deposit-taking institutions. However, to account for overcollateralization requirements associated with these instruments, the level of the covered bond limit needs to be higher than the current 4% level, which limited notional amounts of covered bonds outstanding. Thus, going forward, total assets pledged by a deposit-taking institution for covered bonds must not, at any time, represent more than 5.5% of the issuer’s on-balance sheet assets. In addition, OSFI will continue to impose the following conditions:

  • If at any time, the 5.5% limit is exceeded, the deposit-taking institution must notify OSFI in a timely manner. Excesses due to factors beyond the control of the issuing institution, such as foreign exchange fluctuations, will not require the deposit-taking institution to take action to reduce the amount outstanding. For other excesses, the deposit-taking institution must provide a plan to OSFI, showing how the deposit-taking institution proposes to eliminate the excess quickly.
  • OSFI expects pledging policies of deposit-taking institution to specifically take into account the issuance of covered bonds and the pledging of additional collateral to meet higher overcollateralization requirements, consistent with the limits and conditions contained in this letter.

 

Related Links: OSFI Letter

Effective Date: August 01, 2019

Keywords: Americas, Banking, Securities, Covered Bond Limit Calculation, Basel III, Reporting, Covered Bonds, OSFI

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