OSFI issued a letter outlining how federally regulated banks should treat the new capital made available to small and medium-size enterprises (SME) through the recently announced government programs. The government of Canada announced, on March 27, 2020, that it is making additional investments to support Canadian businesses dealing with the economic impact of COVID-19. The OSFI letter sets out how these exposures should be treated by deposit-taking institutions under the Capital Adequacy Requirements and Leverage Requirements Guidelines.
The OSFI letter is addressed to banks, bank holding companies, and federally regulated trust and loan companies. OSFI has specified the following capital treatment for each program:
- Canada Emergency Business Account. Banks taking on these loans can exclude them from their risk-based capital and leverage ratios.
- New Export Development Canada loan guarantee for SMEs. Banks taking on these loans would treat the portion of the loan backed by the government as a sovereign exposure, with the remaining portion treated as a loan to the borrower. The entire amount of the loan would be included in the leverage ratio calculation.
- New Business Development Bank of Canada co-lending program for SMEs. Banks taking on these loans would need to account for the portion of the loan that they hold in their risk-based capital and leverage ratios.
By announcing the capital treatment for loans made through these programs, OSFI is providing timely direction for institutions, financial markets, and borrowers. These and other responsive regulatory adjustments—such as the adjustment of a number of regulatory capital, liquidity, and reporting requirements in the banking, insurance, and pensions sectors and 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 that its capital and liquidity requirements are fit-for-purpose during these extraordinary circumstances.
Keywords: Americas, Canada, Banking, SME, COVID-19, Regulatory Capital, CAR Guidelines, Leverage Requirements Guideline, Basel III, OSFI
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