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 Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
EP Reaches Agreement on Corporate Sustainability Reporting Directive
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
PRA Consults on Model Risk Management Principles for Banks
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
EC Regulation Amends Standards for Calculating Credit Risk Adjustments
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
BIS Hub Updates Work Program for 2022, Announces New Projects
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
EIOPA Consults on Review of Securitization Framework in Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
UK Authorities Issue Regulatory and Reporting Updates for Banks
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
BCBS Issues Climate Risk Principles while HKMA Expresses Its Support
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.
