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    OSFI Outlines Capital Treatment for COVID-19 Loan Guarantee Program

    January 27, 2021

    OSFI issued a letter to federally regulated deposit-taking institutions on the capital treatment of new loans to businesses through the Highly Affected Sectors Credit Availability Program (HASCAP). The government of Canada mandated the Business Development Bank of Canada (BDC) to set up the HASCAP loan guarantee program and work with eligible lenders to provide additional liquidity for Canadian businesses highly affected by the COVID-19 pandemic. OSFI expects federally regulated lenders to treat HASCAP loans as a sovereign exposure based on the BDC guarantee and to apply the relevant risk-weight under the Capital Adequacy Requirements Guideline of OSFI.

    The OSFI letter is addressed to banks, bank holding companies, and federally regulated trust and loan companies. The letter specifies the following key points:

    • The BDC guarantee can be recognized as a guarantee under the Capital Adequacy Requirements Guideline, as it meets the related operational requirements set out in paragraphs 75 and 76 of Chapter 5 of the Guideline.
    • If there are currency or maturity mismatches, the amount of the guarantee recognized for capital purposes would need to be adjusted according to section 5.1.6 of the Capital Adequacy Requirements Guideline.
    • Under the Standardized Approach to credit risk, the guaranteed loan would receive the risk-weight applicable to the government of Canada (0%), the guarantor.
    • Under the Internal Ratings Based Approach to credit risk, the guaranteed loan would be treated with the Probability of Default substitution approach and/or the Loss Given Default adjustment approach as outlined in section 6.8.7 (ix) of the Capital Adequacy Requirements Guideline.
    • In calculating the leverage ratio, the entire amount of the loan would need to be included in the exposure measure of the leverage ratio pursuant to the Leverage Requirements Guideline paragraph 12.

    By announcing the capital treatment of this loan program, OSFI is providing timely direction for institutions, financial markets, and borrowers. These and other responsive regulatory adjustments, in addition to the ongoing supervisory vigilance, ensure that the OSFI guidance is appropriate for these extraordinary circumstances while remaining risk-focused and forward‑looking. OSFI will continue to look for ways to ensure its capital and liquidity requirements are fit for purpose during the pandemic.

     

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    Keywords: Americas, Canada, Banking, COVID-19, Regulatory Capital, CAR Guideline Leverage Requirements Guideline, Basel, Guarantee Scheme, Loan Guarantee, Credit Risk, OSFI

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