OSFI Announces Significant Regulatory Adjustments Amid COVID-19 Crisis
OSFI announced further regulatory adjustments to support the financial and operational resilience of federally regulated banks and insurance companies, in light of the COVID-19 outbreak. The measures focus primarily on capital adequacy and reporting requirements for these institutions. The key announcements relate to the temporary exclusions to the leverage ratio requirements, lowering of the capital floor for certain banks, further clarity on the transitional arrangements for regulatory capital treatment of expected credit loss (ECL) accounting, extension of the deadline for implementation of initial margin requirements, and changes to regulatory reporting requirements. In this context, OSFI has published three letters, with one letter each addressed to banks, insurers, and financial institutions that are federally regulated in Canada.
Temporary exclusions to leverage ratio requirements
Deposit-taking institutions can temporarily exclude, from the leverage ratio exposure measure, exposures related to central bank reserves and sovereign-issued securities that qualify as High Quality Liquid Assets (HQLA) under the Liquidity Adequacy Requirements Guideline. Institutions that use a primary dealer to access Bank of Canada asset purchase programs and that do not have a settlement account at the Bank of Canada, are permitted to exclude the proceeds of the sale of securities into the Bank of Canada asset purchase programs from their leverage ratio exposure measure. This treatment is effective immediately and will remain in place until April 30, 2021. Capital freed up through this measure should not be distributed (e.g., as dividends or bonus payments) but should be used to support lending and financial intermediation activities.
Lowering of the capital floor for banks using the Internal Ratings Based approach to credit risk
OSFI is lowering the floor factor from 75% to 70%, effective immediately. The floor factor of 70% is expected to stay in place until the domestic implementation of the Basel III capital floor in the first quarter of 2023. The 70% level ensures that the floor continues to protect against model risk while maintaining the risk sensitivity of the capital framework for deposit-taking institutions subject to the internal ratings-based approach.
Clarity on the transitional arrangements for the regulatory capital treatment of expected credit loss (ECL) accounting
OSFI has published a letter that details the transitional arrangements for capital treatment of expected loss provisioning. The letter clarifies the treatment of exposures under the standardized and internal ratings-based approaches for the regulatory capital treatment and the Basel Capital Adequacy Reporting (BCAR). Additionally, in their Pillar 3 disclosures, deposit-taking institutions are expected to separately make available each of the common equity tier 1 (CET1), tier 1, Total Capital, TLAC, and leverage ratios had the transitional arrangement not been applied. Additional details on the specific disclosure requirements will be communicated in the coming weeks. Furthermore, On March 27, 2020, OSFI introduced transitional arrangements for ECL provisioning. At this time, OSFI does not plan to adjust the ECL capital treatment outlined in that letter. Although BCBS is allowing jurisdictions the option of applying a 100% add-back of allowances to CET1 capital, OSFI is of the view that a maximum add-back of 70% is appropriate. The three-year transition will allow deposit-taking institutions the ability to phase-in the impact of increased ECL allowances in CET1 capital while acknowledging that these provisions are being taken.
Extension of deadline for implementation of initial margin requirements
OSFI is extending the deadline for implementation of the final two phases of the initial margin requirements for non-centrally cleared derivatives outlined by one year. In this context, OSFI has published a revised version of Guideline E-22 Margin Requirements for Non-Centrally Cleared Derivatives to reflect this revision. With this extension, the final implementation phase will take place on September 01, 2022, at which point covered entities with an aggregate average notional amount (AANA) of non-centrally cleared derivatives greater than CAD 12 billion will be subject to the requirements. As an intermediate step, from September 01, 2021 covered entities with an AANA of non-centrally cleared derivatives greater than CAD 75 billion will be subject to the requirements.
Amendments to requirements for regulatory reporting
Given the current environment, the implementation of changes to certain regulatory returns will be delayed. For deposit-taking institutions,
- For the Interbank and Major Exposures Return (EB/ET 2L), formal reporting is being postponed from the third quarter of 2020 to the first quarter of 2021. Additionally, the test data submission scheduled for the second quarter of 2020 will be postponed to the fourth quarter of 2020.
- For HELOC return (J2), the formal reporting is being postponed from September 30, 2020 to March 31, 2021. Deposit-taking institutions will be expected to participate in an ad-hoc test, based on September 2020 data to be submitted by November 15, 2020.
- For the Trading Income & GoC Securities Trading Income Return, formal reporting postponed from the first quarter of 2021 to the first quarter of 2022. Additionally, test data will be postponed from the second quarter of 2020 to the first quarter of 2021.
However, the regulatory return implementations that will continue as scheduled in the first quarter of 2021 are Standardized Institutions Risk Asset Portfolio Information (RAPID1), IRB Credit Data Wholesale Transaction (BF), Mortgage Loans (E2), and Net Stable Funding Ratio Return (DT1). All other return changes under consideration for implementation in fiscal 2021 will be deferred to fiscal 2022. Furthermore, no changes are planned to the insurance financial returns until the implementation of IFRS 17. Additionally, the following regulatory returns will be subject to extended filing deadlines on a temporary basis for deposit-taking institutions:
- The new Bank of Canada (BoC) Balance Sheet by Booking Location (Z4) return filing deadline will be extended from 31 days to 45 days for the reference periods of March, April, and May 2020.
- The BoC Geographic Distribution of Assets and Liabilities Booked In/Outside of Canada (GR/GQ) returns filing deadline for the reference period of March 31, 2020 will be extended. For the GQ return, the filing deadline will be extended from 40 days to 45 days. The GR and the Geographical Reconciliation Return with Consolidated Monthly Return of Assets & Liabilities (T2) returns will be extended from 60 days to 75 days.
Recognizing that some federally regulated financial institutions may encounter difficulties in meeting deadlines for certain regulatory filings, OSFI is prepared to offer flexibility on a case-by-case basis. Where circumstances prevent an institution from filing on time, the institution should contact its lead supervisor, indicating the regulatory return(s) it is seeking an extension for, including the rationale necessitating the request. In relation to returns where BoC is the contact agency, institutions requesting flexibility should contact BoC directly through their regular contacts. In appropriate circumstances, OSFI may grant a federally regulated financial institution an extension to file a return that does not have a statutory due date. Once OSFI has granted such an extension, a Notice of Violation for a Late & Erroneous Filing Penalty (LEFP) will not be issued so long as the institution files on or before the revised due date. If the institution does not file on or before the revised due date, a Notice of Violation may be issued or any other actions may be taken by OSFI.
- News Release
- Letter to Banks
- Letter to Financial Institutions
- Transitional Arrangements for ECL
- Revised Guideline E-22
- Letter to Insurers
Keywords: Americas, Canada, Banking, Insurance, Accounting, COVID-19, Reporting, Leverage Ratio, Expected Credit Loss, Credit Risk, Regulatory Capital, IFRS 9, OTC Derivatives, Initial Margin, Basel III, OSFI
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous ArticleMAS Announces Measures to Address Impact of COVID-19 Outbreak
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.
DNB Publishes Multiple Reporting Updates for Banks
DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.
NBB Sets Out Climate Risk Expectations, Issues Reporting Updates
The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting
EBA Updates Address Securitization Standards and DGS Guidelines
The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.
FSB Publishes Letter to G20, Sets Out Work Priorities for 2023
The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023