The Office of the Superintendent of Financial Institutions (OSFI) has issued its final version of the Capital Adequacy Requirements (CAR) guideline and Leverage Requirements (LR) guideline. OSFI updates its CAR guideline periodically to ensure capital requirements reflect the underlying risks and developments in the financial industry. The LR guideline supplements this by setting out the framework for the leverage ratio, which helps measure the adequacy of an institution’s capital.
OSFI’s CAR guideline provides a framework for assessing the capital adequacy of banks, bank holding companies, federally regulated trust and loan companies and cooperative retail associations. OSFI initially issued the revised CAR guideline for public consultation in July 2018. The main revisions to the guideline include:
- Replacing the Current Exposure Method (CEM) with the domestic implementation of the Standardized Approach for measuring Counterparty Credit Risk (SA-CCR), which will include new rules for capitalizing exposures to central counterparties and the securitization framework;
- Incorporating changes to the capital floor as outlined in OSFI’s letter dated January 12, 2018;
- Clarifying the capital treatment for right-of-use assets resulting from the adoption of IFRS 16;
- Confirming Kroll Bond Rating Agency Inc. as an eligible external credit assessment institution (ECAI) for capital purposes; and
- Providing clarifications throughout the CAR guideline in response to questions received from the industry.
As discussed in our previous post, the LR guideline sets out the framework for the leverage ratio, which provides an overall measure of the adequacy of an institution’s capital and serves as a supplementary measure to the risk-based capital requirements specified in the CAR guideline. OSFI issued the revised LR guideline for public consultation in August 2018 and includes the following revisions:
- Replacing the CEM with the SA-CCR as the new method for computing counterparty credit risk exposure amounts for derivatives to align with the CAR;
- Amending the treatment of securitized assets that meet the operational requirements for recognition of significant risk transfer (SRT) and amending the credit conversion factors for off-balance sheet securitization exposures to align with the CAR; and
- Allowing institutions to consider open-maturity securities financing transactions (SFTs) as overnight trades for the purposes of measuring cash payables and cash receivables in SFTs with the same counterparty on a net basis, providing the institution is able to demonstrate that: 1) it can contractually and operationally collapse an open maturity trade on the next business day without incurring legal or reputation risk; and 2) the trades are priced similarly to overnight trades.
The December 2017 Basel III reforms, as discussed in our previous post, include revisions to the Basel III leverage ratio framework. OSFI will consider these revisions separately as part of the domestic implementation of Basel III, and will consult stakeholders as part of the consultation process for any future changes to the LR guideline. As part of the publication of both guidelines, OSFI has included summaries of the comments received for the CAR and LR from industry stakeholders and an explanation of how these comments have been addressed in the updated guidelines. Both of these guidelines will be released for implementation in Q1 2019.
The author will like to thank Abigail Court, articling student, for her contribution to this article.