Advancing a more resilient and proportional banking regulatory framework in Canada

OSFI launches consultations on Basel III implementation and a new tailored approach to capital and liquidity requirements for smaller, less complex banks 

OTTAWA, ON, March 11, 2021 /CNW/ - The Office of the Superintendent of Financial Institutions (OSFI) plays an essential role in building and preserving resiliency in Canada's financial system. OSFI's commitment to implementing the international Basel III Framework has strengthened Canadian banks and improved their ability to handle financial shocks, so they can continue to support economic growth while remaining competitive. 

Today OSFI launched an industry consultation on proposed regulatory changes to introduce the latest and final round of Basel III reforms into its capital, leverage and related disclosure guidelines for banks. OSFI's proposals are in line with the international standards set by the Basel Committee on Banking Supervision (BCBS), while reflecting the Canadian market. Along with these updates, OSFI is proposing changes to enhance proportionality in its capital and liquidity regimes so they remain appropriate for smaller, less-complex banks.

OSFI is seeking input on its proposals until June 4, 2021, while consultation on changes to its disclosure guideline is open until July 2, 2021. OSFI will publish a summary of comments with the release of its final guidance in late 2021.

Improving the risk sensitivity and comparability of bank capital requirements

The final set of Basel III reforms seeks to enhance the way institutions calculate risk-weighted assets and improve the comparability and transparency of their capital ratios. To support these objectives, OSFI proposes to make its Capital Adequacy Requirements Guideline more resilient and risk-sensitive, including by making the following enhancements:

• Better aligning capital requirements with risk;
• Reducing excessive variability of modelled outcomes; and
• Integrating the Basel III changes into OSFI's aggregate output floor—a regulatory backstop that ensures a bank's model-based risk-weighted assets do not fall below a minimum level.

Reinforcing the strength of the bank leverage and liquidity regimes

OSFI is also proposing changes to its Leverage Requirements Guideline to complement the risk-based revisions made to its capital requirements, and continue to safeguard institutions against excessive borrowing.

As well, OSFI is making changes to its Liquidity Adequacy Requirements Guideline to improve risk-sensitivity and to ensure that institutions are holding enough cash or other liquid investments to provide for contingent liquidity demands and support continued lending, particularly during periods of financial stress.

Enhancing transparency and improving comparability in disclosure requirements

In addition, OSFI is consulting on updates to its Pillar 3 Disclosure Guideline. These proposed changes enhance transparency surrounding the capital, leverage and liquidity positions of Canada's largest banks while ensuring comparability and consistency with the disclosures of their global peers. Similar but proportional updates are being developed for Canada's smaller, less-complex banks.

Tailoring capital and liquidity expectations for small- and medium-sized banks (SMSBs)

OSFI is unveiling the SMSB Capital and Liquidity Requirements Guideline, a new guideline that outlines revisions to the capital and liquidity frameworks for SMSBs which are more tailored to reflect the unique attributes of these institutions. OSFI used input from its January 2020 consultative document: Advancing Proportionality to design the new framework.   

Quote

"The proposed changes aim to advance a more resilient and proportional bank regulatory regime in Canada that protects depositors, maintains market confidence and promotes continued financial stability, especially during times of stress."

Ben Gully, Assistant Superintendent.

Background on the Basel III Framework:

• The BCBS sets the global standard for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters.
• The Basel III Framework is a response to the financial crisis of 2007-09. The measures aim to strengthen the regulation, supervision and risk management of banks.
• The Basel III Framework has been phased in through a series of regulatory changes and allows regulatory authorities some flexibility to adopt standards in ways that work for their jurisdiction.
• Early Basel III reforms aimed at improving the quantity and quality of capital have been effective in supporting bank resiliency during the pandemic.
• The final set of Basel III reforms were issued in December 2017. As part of the consolidated Basel III Framework, more robust market risk standards were introduced in January 2019 and the disclosure requirements (Pillar 3 in the Basel III framework) were updated in December 2019.

Associated Links

• Related letter to industry – Provides an overview of the major guidance changes
• BIS – Basel III: Finalizing post-crisis reforms (2017)
• BIS – Basel III: Minimum capital requirements for market risk (2019)
• BIS – Basel III: Pillar 3 Disclosure Framework (2019)
• BIS – Deferral of Basel III implementation in light of COVID-19

About

The Office of the Superintendent of Financial Institutions (OSFI) is an independent agency of the Government of Canada, established in 1987, to protect depositors, policyholders, financial institution creditors and pension plan members, while allowing financial institutions to compete and take reasonable risks. OSFI supervises more than 400 federally regulated financial institutions and 1,200 pension plans to determine whether they are in sound financial condition and meeting their prudential requirements.

SOURCE Office of the Superintendent of Financial Institutions

Media Contact: OSFI - Public Affairs, [email protected], 343-550-9373