The Office of the Superintendent of Financial Institutions (OSFI) has issued proposed revisions (the Revisions) to certain chapters of the Liquidity Adequacy Requirements (LAR) guidelines. The LAR set out the framework that Canadian deposit-taking institutions (DTIs) must follow to mitigate the risk of a stressed environment leading to insufficient liquidity. The Revisions are a response by OSFI to what it perceives to be changing business practices of DTIs, notably that “institutions are increasingly funding their business with deposits that tend to exhibit higher risk of withdrawals in periods of stress.”
The Revisions include changes to the calculation for the Liquidity Coverage Ratio, as set in Chapter 2, as well as adjustments to how Net Cumulative Cash Flow is calculated in Chapter 4. The Revisions also include the introduction in Chapter 5 of the Liquidity Activity Monitor, a tool which provides OSFI with frequent and timely account balances for liquidity monitoring purposes. The Revisions will apply to DTIs and are proposed to come into effect on January 1, 2020.
Also, OSFI has issued a draft guideline (the Guideline) on Net Stable Funding Ratio (NSFR) disclosure requirements. This disclosure regime complements the NSFR standard set out in Chapter 3 of the LAR, which is a metric that focuses on the stability of an institution’s funding profile over a one-year horizon The purpose of the disclosures required by the Guideline is to provide transparency over banks’ funding risk, thereby allowing this metric to become the subject of comparison and market discipline. The Guideline will apply to Canadian Domestic Systematically Important Banks (D-SIBs), with a commencement date proposed for the quarterly reporting period ending January 31, 2021.
Important aspects of the Guideline include:
- Key quantitative reporting requirements are captured in the NSFR disclosure template, which is included in the Appendix to the Guideline. D-SIBs are required to complete the template with data based on quarter-end positions. Further qualitative disclosure should be supplemented where it would assist the reader in understanding the quantitative results disclosed.
- Disclosures required by the Guideline should be easy to locate. They could be featured in a standalone document, or a D-SIB may choose to append the disclosure as part of its financial reports.
- Disclosures required by the Guideline should also be accessible via the D-SIBs website for period of at least 12 months. Where investor information is available for longer periods in the normal course, the NSFR disclosure should be accessible for the same period of time.
The Revisions and Guideline are currently the subject of a consultation period. OSFI will consider all comments received by March 15, 2019 in drafting the respective final versions.
Thanks to Eric Vice, articling student, for his contribution to this article.