OSFI is updating the covered bond limit calculation, which was last revised in December 2014. The updated covered bond ratio calculation will be effective from August 01, 2019 and is applicable for all deposit-taking institutions issuing covered bonds. Going forward, the total assets pledged by a deposit-taking institution for covered bonds must not, at any time, represent more than 5.5% of the on-balance-sheet assets of an issuer.
To improve simplicity of the covered bond limit calculation, OSFI is replacing the Assets to Capital Multiple (ACM) proxy of total assets with on-balance sheet assets as reported on the regulatory balance sheet return (M4). OSFI is also updating the numerator of the calculation to better reflect the amount of assets encumbered through covered bonds by capturing the overcollateralization associated with these instruments. By definition, this amount will always be higher than the notional amount of covered bonds issued.
The intent of these updates is to neither increase nor decrease the covered bond issuance capacity for deposit-taking institutions. However, to account for overcollateralization requirements associated with these instruments, the level of the covered bond limit needs to be higher than the current 4% level, which limited notional amounts of covered bonds outstanding. Thus, going forward, total assets pledged by a deposit-taking institution for covered bonds must not, at any time, represent more than 5.5% of the issuer’s on-balance sheet assets. In addition, OSFI will continue to impose the following conditions:
- If at any time, the 5.5% limit is exceeded, the deposit-taking institution must notify OSFI in a timely manner. Excesses due to factors beyond the control of the issuing institution, such as foreign exchange fluctuations, will not require the deposit-taking institution to take action to reduce the amount outstanding. For other excesses, the deposit-taking institution must provide a plan to OSFI, showing how the deposit-taking institution proposes to eliminate the excess quickly.
- OSFI expects pledging policies of deposit-taking institution to specifically take into account the issuance of covered bonds and the pledging of additional collateral to meet higher overcollateralization requirements, consistent with the limits and conditions contained in this letter.
Related Links: OSFI Letter
Effective Date: August 01, 2019
Keywords: Americas, Banking, Securities, Covered Bond Limit Calculation, Basel III, Reporting, Covered Bonds, OSFI
Previous ArticleOSFI Proposes Changes to Instruction Guide for Pension Plans
EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).
EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.
BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test.
PRA published a consultation paper (CP3/21) proposes rules regarding the timing of identity verification required for eligibility of depositor protection under the Financial Services Compensation Scheme (FSCS).
FSB published the work program for 2021, which reflects a strategic shift in priorities in the COVID-19 environment.
FCA announced that 50% firms have started using the new data collection platform RegData, which is slated to replace the existing platform known Gabriel.
Bundesbank published Version 5.0 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.
ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.