On April 9, 2020, the Office of the Superintendent of Financial Institutions (OSFI) announced further measures to support the financial and operational resilience of Canada’s federally regulated financial institutions as they respond to the challenges of COVID-19. The announcement sets out sector-specific guidance focused primarily on measures to support lending in the current environment and provides for certain regulatory filing extensions.
This latest announcement follows OSFI’s earlier sector-specific guidance issued on March 27, 2020, a directive published on March 30, 2020 on the treatment of new capital available to small- and medium-sized enterprises through recently announced government programs, and OSFI’s decision on March 13, 2020 to lower the domestic stability buffer for Canada’s systemically important banks. For more detail on OSFI’s previously announced measures, see our earlier Blakes Bulletins: OSFI Announces Immediate Measures in Response to COVID-19 and Market Conditions and OSFI Announces Further Actions in Response to COVID-19.
ADDITIONAL OSFI GUIDANCE FOR BANKS
Leverage Ratio: Effective immediately, central bank reserves and sovereign-issued securities that qualify as High-Quality Liquid Assets under OSFI’s Liquidity Adequacy Requirements Guideline are temporarily excluded from determining a bank’s leverage ratio (which measures the bank’s Tier 1 capital to its assets, without risk-weighting them). Small and medium-sized banks that use a primary dealer to access Bank of Canada asset purchase programs and that do not have a settlement account at the Bank of Canada may exclude from the leverage ratio calculation proceeds of the sale of securities into this purchase program. These adjustments are intended to free up more capital to support additional lending by banks and may not be used for shareholder or employee distributions. They will remain in effect until April 30, 2021. OSFI announced earlier that banks are “encouraged” to use their operating buffers that are held above the leverage ratio.
Capital Floor: Effective immediately, OSFI is lowering the capital floor applicable to Canada’s large banks using the internal ratings-based (IRB) approach to calculating credit risk from 75 per cent to 70 per cent. The capital floor sets a minimum (based on OSFI’s standardized approach for calculating credit risk) on capital requirements calculated using the model-based IRB approach. The 70 per cent floor will stay in place until the domestic implementation of the Basel III capital floor anticipated in Q1 2023.
Expected Credit Loss (ECL) Provisioning: In its March 27 announcement, OSFI introduced transitional arrangements for ECL provisions available under the Basel Framework, allowing for a portion of allowances that would otherwise be included in Tier 2 capital to instead be included in Common Equity Tier 1 (CET1) capital. In its April 9 announcement, OSFI clarified that while recently released measures from the Basel Committee on Banking Supervision (Basel Committee) permit jurisdictions the option to apply a 100 per cent add-back of allowances to CET1 capital for the two-year period comprising years 2020 and 2021, OSFI’s view is that a maximum add-back of 70 per cent for fiscal 2020 is appropriate. The adjustment to CET1 capital is subject to a scaling factor that will decrease to 50 per cent in fiscal 2021 and 25 per cent in fiscal 2022. For more information on the Basel Committee’s recent measures, see our April 2020 Blakes Bulletin: COVID-19: New Measures Announced in Respect of Basel Capital Framework.
Margin Requirements for Non-centrally Cleared Derivatives: Following a recent decision by the Basel Committee and The International Organization of Securities Commissions, OSFI announced it will extend by one year the deadline for implementation of the final two phases of the initial margin requirements for non-centrally cleared derivatives, as outlined in OSFI’s Guideline E-22 Margin Requirements for non-centrally cleared derivatives (Guideline E-22). OSFI has published a revised version of Guideline E-22 to reflect this.
For more detail, see OSFI’s full letter to deposit-taking institutions.
ADDITIONAL OSFI GUIDANCE FOR INSURERS
Loan Payment and Premium Deferrals: Consistent with similar measures announced earlier for banks, OSFI advises federally regulated insurers that loan payment and premium deferrals granted due to COVID-19 will not on their own affect the treatment of these loans and assets as performing assets under OSFI’s Life Insurance Capital Adequacy Test (LICAT) guideline. This means loans for which payments are deferred due to COVID-19 will not have to be treated as falling within the impaired and restructured category and will not be subject to a higher credit risk factor because of the payment deferrals. Similarly, in the event of a premium deferral, the related assets will not automatically be subject to higher credit risk factors under the applicable capital guidelines for insurers: LICAT, Minimum Capital Test, or Mortgage Insurer Capital Adequacy Test. However, insurers are expected to continue to follow sound credit risk management practices and assess a party’s credit quality and ability to make contractual payments. This capital treatment will remain in place for the duration of the deferral (up to a maximum of six months) and can be applied by insurers calculating their capital position for all COVID-19-related deferrals, even if they were made before April 9, 2020. OSFI notes that insurers granting payment deferrals may be subject to additional reporting requirements surrounding the deferrals. Details on additional reporting requirements, if any, will be communicated in the coming weeks.
LICAT Interest Rate Risk: OSFI also announced certain changes to interest rate risk requirements under LICAT. Specifically, the interest rate risk requirement for a par block in any given quarter will be equal to the average of the current requirement for the block, and the requirements over the five previous quarters (i.e., the rolling average over six quarters). Insurers may determine interest rate risk requirements for par at Q1 2020 using either the current LICAT requirements or the rolling averages. Beginning in Q2 2020, the rolling average approach will become mandatory until OSFI communicates otherwise. OSFI also confirmed that the public consultation on an updated version of the LICAT guideline announced in February 2020 is currently on hold.
For more detail, see OSFI’s full letter to federally regulated insurers.
REGULATORY FILING EXTENSIONS
While stressing that timely and accurate information from federally regulated financial institutions is vital, especially in the current environment, OSFI is offering flexibility on regulatory filing deadlines, but on a case-by-case basis. Where an institution seeks flexibility, it should inform OSFI proactively about any operational or technical challenges it is encountering as a result of COVID-19 and indicate the rationale for the requested extension. Where the Bank of Canada is the contact agency for the regulatory return, a request for flexibility should be made directly to the Bank of Canada.
OSFI does not have authority to provide a filing extension for a return with a statutory due date and missing such a due date may lead to a Notice of Violation for Late & Erroneous Filing Penalty (LEFP). In all other cases where OSFI determines to grant an extension, a LEFP will not be issued if the institution files the return on or before the revised due date.
Please see OSFI’s full letter on regulatory filing extensions.
For further information, please contact:
Paul Belanger 416-863-4284
Vladimir Shatiryan 416-863-4154
Ora Morison 416-863-2712
or any other member of our Financial Services Regulatory group.
Please visit our COVID-19 Resource Centre to learn more about how COVID-19 may impact your business.
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