OSFI Outlines Capital Management Expectations for Banks Amid Pandemic
OSFI published a letter that provides additional information on supervisory expectations about capital management for deposit-taking institutions amid the COVID-19 pandemic. The letter clarifies expectations on the use of Pillar 2 capital buffers by deposit-taking institutions using the standardized approach to credit risk and outlines prudent capital management actions in the current environment. With respect to the frequently asked questions (FAQs) on COVID-19 measures, OSFI added clarifications on use of capital buffers and prudent capital management.
The current capital regime for deposit-taking institutions is multi-layered and includes minimum capital requirements, along with the Pillar 1 and Pillar 2 capital buffers. Pillar 1 capital buffers include a capital conservation buffer for all deposit-taking institutions and an additional surcharge of 1% of risk-weighted assets for domestic systemically important banks or D-SIBs. Pillar 2 capital buffers include institution-specific buffers and domestic stability buffer for domestic systemically important banks. OSFI clarifies that the ability to use Pillar 2 capital buffers in times of stress, like the current COVID-19 pandemic, applies to all deposit-taking institutions, including those using the standardized approach to credit risk. Deposit-taking institutions that plan to use Pillar 2 buffers by operating below their internal capital targets should discuss this with their designated Lead Supervisor. Additionally, OSFI expects small and medium-sized banks to be closely tracking their credit portfolios and reporting on developments to OSFI on a regular basis.
Within the FAQs, OSFI specifies that changes to the capital risk-weights under the standardized approach for credit risk as a result of the circumstances stemming from COVID-19 are not currently under consideration. As stated in its letter, OSFI expects all deposit-taking institutions, including those using the standardized approach to credit risk, to consider the appropriateness of their capital management actions in the current environment. This includes the following:
- In cases where deposit-taking institutions are using their capital buffers, they should use the capacity prudently and consider appropriate capital conservation actions. An institution should also have a plan for how it expects to manage its risks and restore capital.
- Deposit-taking institutions should consider stress testing information (including plausible future adverse scenarios) as part of the capital management decision-making process.
- Deposit-taking institutions must ensure that they undertake prudent capital management actions to protect depositors and other creditors while taking reasonable risks.
Related Links
Keywords: Americas, Canada, Banking, COVID-19, Credit Risk, Pillar 1, Pillar 2, Standardized Approach, Regulatory Capital, FAQ, OSFI
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous Article
US Agencies Ease Requirement for Market Risk Amid COVID VolatilityRelated Articles
EBA Proposes Standards for IRRBB Reporting Under Basel Framework
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
FED Issues Further Details on Pilot Climate Scenario Analysis Exercise
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
