On March 27, 2020, and March 30, 2020, the Office of the Superintendent of Financial Institutions (OSFI) announced additional measures to support the financial and operational resilience of federally regulated financial institutions as they respond to the challenges presented by COVID-19. These measures follow OSFI’s earlier decision on March 13, 2020, to lower the domestic stability buffer for Canada’s systemically important banks.
The announcement on March 27, 2020, details sector-specific responses through letters issued to federally regulated deposit taking institutions (banks), insurers and private pension plans. The announcement on March 30, 2020, addresses the capital treatment of government programs to support COVID-19 efforts. This bulletin considers the changes relevant to banks and federally regulated insurers.
OSFI GUIDANCE FOR BANKS
The key announcements included in OSFI’s guidance for banks included the following
Payment Deferrals: Where a bank grants a payment deferrals on loans—including mortgage loans, small business loans, credit cards and other retail loans, and mid-market commercial loans—these loans will continue to be treated as performing loans under OSFI’s Capital Adequacy Requirements (CAR) Guideline. As such, they will not be subject to a different risk weight under the standardized approach and will not be considered delinquent when determining the probability of default for banks using the internal ratings-based approach. This capital treatment will remain in place for the duration of the payment deferral, for a maximum of six months. Banks granting payment deferrals will be subject to additional reporting, with additional details to follow in the coming weeks.
IFRS 9: OSFI provided guidance on the accounting for expected credit losses due to COVID-19. Among other things, OSFI noted that the use of a payment deferral program should not result in an automatic trigger, all things being equal, for significant increase in credit risk. Noting that IFRS 9 is principles-based and requires the use of experienced credit judgment, OSFI noted that it expects banks to provide sufficient and timely disclosures to allow users to understand assumptions and judgments made by bank management.
Capital Treatment for Government Programs: OSFI announced the following capital treatment for recently announced COVID-19 government assistance programs:
Canada Emergency Business Account: Banks taking on these loans can exclude them from their risk-based capital and leverage ratios.
New EDC Loan Guarantee for Small and Medium Enterprises: Banks taking on these loans would treat the portion of the loan backed by the federal government as a sovereign exposure, with the remaining portion treated as a loan to the borrower. The entire amount of the loan would be included in its leverage ratio calculation.
New BDC Co-Lending Program for Small and Medium Enterprises: Banks taking on these loans would need to account for the portion of the loan that they hold in their risk-based capital and leverage ratios.
Covered Bond Limit: Banks will be permitted to temporarily exceed the current covered bond limit of 5.5 per cent of an issuer’s on-balance sheet assets to be able to pledge covered bonds as collateral to the Bank of Canada. This change will be in place for at least a year and may be extended further. During this period, total assets pledged for covered bonds may not exceed 10 per cent of a bank’s total assets. The maximum amount of pool assets relating to market instruments will remain at 5.5 per cent. OSFI expects that banks exceeding the 5.5 per cent limit to return below this threshold as soon as market funding conditions permit, in accordance with a plan to be submitted to OSFI.
Use of Buffers: To increase lending capacity, earlier this month OSFI lowered the domestic stability buffer for Canada’s six systemically important banks to one per cent. While the domestic stability buffer applies in respect of banks’ risk-based capital ratios, OSFI makes clear in the March 27, 2020, letter that banks are also “encouraged” to use their operating buffers that are held above the leverage ratio, which measures a bank’s tier 1 capital to its non-risk based assets. Likewise, OSFI is reminding banks that it expects banks to use their high quality liquid assets as a defence both against the potential onset of liquidity stress and during a period of liquidity stress, even if it results in falling below the minimum 100 per cent liquidity coverage ratio (LCR).
Liquidity Requirements: OSFI also made clarifications in respect of the LCR calculation in connection with recent announcements by the Bank of Canada that it will accept a broader pool of assets as collateral from financial institutions and the launch of a new Bankers’ Acceptance Purchase Facility (BCAP). Specifically, OSFI confirms that, under the current Liquidity Adequacy Requirements (LAR) Guideline, no outflow is assumed to occur for a bank’s secured funding transactions with the Bank of Canada, regardless of the type of collateral used in the transaction. OSFI also clarifies that no outflow needs to be recognized for bankers’ acceptances sold to the Bank of Canada under the BCAP facility. OSFI also announced some flexibility in the net stable funding ratio treatment for assets encumbered as part of Bank of Canada’s liquidity operations during stress periods. Additionally, OSFI noted that banks may extend the current definition of ‘hardship’ under the LAR Guideline for retail and small business term deposits to include situations borne out of current circumstances. The hardship exception provides that where a bank allows a depositor, in hardship circumstances, to withdraw term deposits without a penalty or despite a clause prohibiting early withdrawals, the bank does not have to change the treatment of that entire pool of deposits to demand deposits, in calculating the LCR cash outflows.
Basel III Reforms: OSFI is delaying the implementation of the final set of Basel III reforms—including revisions to credit risk standardized and IRB approach, operational risk framework, leverage ratio framework, introduction of a more sensitive capital floor and revised Pillar 3 disclosure requirements—to Q1 2023, while the fundamental review of the trading book and the revised credit valuation adjustment risk framework is delayed to Q1 2024. These measures are consistent with the implementation deferrals concurrently announced by the Basel Committee or Banking Supervision.
Proportionality Initiative: OSFI is also deferring the implementation of the recently announced capital and liquidity proportionality initiative for small and medium-sized banks to Q1 2023.
Regulatory Returns: OSFI recognizes that some institutions may need additional time to meet upcoming deadlines for filing regulatory returns and is prepared to offer some flexibility. Institutions requiring flexibility should email their OSFI lead supervisor.
For additional details, please refer to OSFI’s full letter as well as our March 2020 Blakes Bulletin: OSFI Announces Immediate Measures in Response to COVID-19 and Market Conditions.
OSFI GUIDANCE FOR FEDERALLY REGULATED INSURERS
Echoing the guidance issued for banks, OSFI notes that mortgage insurers, in determining regulatory capital requirements, should not consider a mortgage loan to be delinquent or in arrears if a bank has approved a deferral of mortgage payments, and the borrower respects the terms of the deferral.
OSFI also announced delays in insurance-related regulatory developments. Public consultations on revisions to Guideline B-2 – Investment Concentration Limit for Property and Casualty Insurance Companies, Guideline E4A – Role of the Chief Agent and Record Keeping Requirements, proposed updates to the draft Guideline A: 2020 Life Insurance Capital Adequacy Test (LICAT), and draft IFRS Insurance Returns are on hold, as is OSFI’s discussion paper on technology and related risks and the final version of Guideline E-25 – Internal Model Oversight Framework. A proposed direct consultation on insurance capital frameworks updated for IFRS 17 and a launch of a quantitative impact study are also on hold. Results for the quantitative impact study on developing a standard approach for determining capital requirements for segregated fund guarantee risk are also no longer required by March 31, 2020. OSFI is also suspending insurers’ IFRS 17 semi-annual progress reporting.
OSFI notes that banks and insurers should consult with their OSFI Lead Supervisor in relation to challenges caused by COVID-19. OSFI will continue to provide additional details on these recent changes, along with clarifications, as required.
For further information, please contact:
Paul Belanger 416-863-4284
Katie Patterson 416-863-2659
Vladimir Shatiryan 416-863-4154
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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