The Office of the Superintendent of Financial Institutions (OSFI) updated the guidelines on capital adequacy requirements, leverage requirements, liquidity adequacy requirements, capital and liquidity requirements for Small and Medium-Sized Deposit-Taking Institutions (SMSBs), and Pillar 3 disclosure requirements for domestic systemically important banks (D-SIBs) and SMSBs. The guidelines on Capital Adequacy Requirements (other than chapters on credit valuation adjustment risk and market risk), leverage requirements, SMSBs, and Pillar 3 will be effective from the second fiscal quarter of 2023 while the revised credit valuation adjustment risk and the market risk chapters of the Capital Adequacy Requirements guideline will be effective from first fiscal quarter of 2024. Additionally, the revised Liquidity Adequacy Requirements Guideline will be implemented as of April 01, 2023. To complement the revised guidelines, OSFI is finalizing corresponding changes to the related regulatory returns, which will be published in February 2022.
The OSFI letter addressed to banking sector entities indicates that the updated rules incorporate the final Basel III banking reforms with additional adjustments to make them suitable for federally regulated deposit-taking institutions. The Annexes to the letter provide non-attributed summaries of the comments received from stakeholders during public consultations on the guidelines in Spring 2021 and an explanation of whether the comments resulted in revisions. The primary changes that have been incorporated in the Capital Adequacy Requirements Guideline include:
- Clarification of supervisory capital targets for deposit-taking institutions, including interactions with capital buffers (Chapter 1)
- Implementation of a 72.5% Basel III output floor to be phased in over three years commencing in second fiscal quarter of 2023 (Chapter 1)
- Introduction of new deductions from common equity tier 1 capital for certain exposures formerly subject to a 1250% risk-weight, and reverse mortgages with loan-to-value ratios greater than 80% (Chapter 2)
- Introduction of new operational risk capital rules through the domestic implementation of the Basel III standardized approach for operational risk and a new simplified standardized approach available for SMSBs (Chapter 3)
- Maintenance of the current capital treatment for general residential real estate exposures with loan-to-value ratios between 70% and 80% (Chapter 4)
- Reduction of credit risk capital requirements for certain qualifying revolving retail exposures, incorporation of updates to the capital treatment of privately insured mortgages, and introduction of a capital treatment for residential real estate exposures that do not meet expectations of OSFI related to Guideline B-20 on residential mortgage underwriting practices and procedures (Chapters 4 and 5)
- Elimination of the 1.06 internal ratings-based scaling factor initially implemented as part of the transition from Basel I to Basel II (Chapter 5)
- Implementation of the revised market risk capital rules, consistent with the fundamental review of the trading book of Basel Committee on Banking Supervision, as well as the revised credit valuation adjustment, or CVA, framework (Chapters 8 and 9)
Below are the key updates with respect to the other guidelines:
- Leverage Requirements Guideline. Application of a leverage ratio buffer to D-SIBs; changes to the leverage requirements (for example, the treatment of securities financing transactions and the treatment of off-balance sheet items) to align with revisions to the Capital Adequacy Requirements Guideline
- Liquidity Adequacy Requirements Guideline. Enhancements to Net Cumulative Cash Flow (NCCF) requirements to improve the recognition of cash flows related to asset growth (Chapter 4); reduction of the time to report NCCF to OSFI for non-D-SIBs and clarifications of the time to report NCCF to OSFI for all institutions during periods of stress
- SMSBs Capital and Liquidity Requirements Guideline. Key features of this new guideline include criteria to segment SMSBs into different categories for the purposes of determining capital and liquidity requirements; separate sections for each category of SMSBs that describe the applicable capital and liquidity requirements and references to the relevant sections of the Capital Adequacy Requirements, Leverage Requirements, and Liquidity Adequacy Requirements Guidelines
- Pillar 3 Disclosure Requirements Guideline. Issuance of separate Pillar 3 Disclosure Guidelines for D-SIBs and SMSBs; incorporation of the complete set of disclosures from the Basel Framework for D-SIBs; and clearer and more proportional disclosure requirements for SMSBs
- Press Release
- Capital Adequacy Requirements Guideline
- Leverage Requirements Guideline
- Liquidity Adequacy Requirements Guideline
- SMSBs Capital and Liquidity Requirements Guideline
- Pillar 3 Disclosure Guideline for D-SIBs
- Pillar 3 Disclosure Guideline for SMSBs
Keywords: Americas, Canada, Banking, Basel, Regulatory Capital, Credit Risk, Market Risk, Operational Risk, Pillar 3, Output Floor, CVA Risk, Disclosures, Reporting, SMSBs, Headline, FRTB, OSFI
Previous ArticleHKMA Issues Update on Benchmark Transition for Banks
The UK authorities have published consultations with respect to the Basel requirements for banks. The Prudential Regulation Authority (PRA) published the consultation paper CP16/22 on rules for the implementation of Basel 3.1 standards.
The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.
The Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS) published a joint report that outlines the initial findings from climate scenario analyses undertaken by financial authorities to assess climate-related financial risks.
The Financial Stability Board (FSB) published a letter intended for the G20 leaders, highlighting the work that it will undertake under the Indian G20 Presidency in 2023 to strengthen resilience of the financial system.
The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.
The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.
The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups
The European Union has finalized and published, in the Official Journal of the European Union, a set of 13 Delegated and Implementing Regulations applicable to the European crowdfunding service providers.
The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.
The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.