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. On March 27, 2020, as a COVID-19 support measure, OSFI had allowed a temporary increase to the covered bond limit to facilitate greater access to the Bank of Canada facilities. OSFI normally limits a bank's issuance of covered bonds to 5.5% of the bank's total assets. However, during the period of relief, total assets pledged for covered bonds were permitted to be up to 10% of the total assets of a deposit-taking institution, including instruments issued to the market and those pledged to the Bank of Canada.
The temporary increase in the limit targeted covered bonds pledged directly to the Bank of Canada, with the limit relating to market instruments (covered bonds sold into the market) still set at 5.5%. When OSFI announced the temporary increase to the covered bond limit in March 2020, it was noted that the increase would be provided for at least one year, but could be extended beyond this if needed. Throughout the past year, OSFI has continued to monitor banks' liquidity and access to term funding, which have stabilized considerably since measures were initially put in place. Additionally, on October 15, 2020, the Bank of Canada removed own-name covered bonds from the list of eligible securities for regular term repo operations. As such, the temporary increase to the covered bond limit by OSFI is no longer necessary. Covered bonds are debt securities issued by a financial institution that are collateralized against a pool of assets designed to cover claims, should an issuer fail.
Keywords: Americas, Canada, Banking, Covered Bonds, COVID-19, ALM, Regulatory Capital, Basel, OSFI
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