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New OSFI Capital and Liquidity Guideline for Small and Medium-Sized Banks

April 15, 2021

On April 8, 2021, the Office of the Superintendent of Financial Institutions (OSFI) held an information session to answer questions from industry on proposed regulatory changes to capital and liquidity requirements for banks and federal trust and loan companies. The proposed changes were announced on March 11, 2021 to implement the final round of Basel III reforms, and to introduce more proportional capital and liquidity standards for small and medium-sized banks and federal trust and loan companies (SMSBs).

Specifically, OSFI is proposing revisions to its Capital Adequacy Requirements Guideline (CAR), Leverage Requirements Guideline (LR), and Liquidity Adequacy Requirements Guideline (LAR), and has drafted a new Small and Medium-Sized Deposit-Taking Institutions Capital and Liquidity Requirements Guideline (SMSB Guideline). OSFI has also proposed changes to the Pillar 3 Disclosure Guideline applicable to Canada’s six domestic systemically important banks (D-SIBs) and plans to develop a Pillar 3 Disclosure Guideline for SMSBs.

OSFI expects to implement the revised guidelines and SMSB Guideline starting fiscal Q1-2023, except for revised CAR chapters 8 and 9, which are expected to come into effect in fiscal Q1-2024.


The draft SMSB Guideline provides tailored revisions to capital and liquidity frameworks to be read in conjunction with the relevant portions of the CAR, LR, and LAR. The draft SMSB Guideline sets out the criteria for segmenting SMSBs into three categories for the purpose of determining their capital and liquidity requirements and describes which parts of the CAR, LR and LAR apply to each SMSB category. Publication of the new draft SMSB Guideline follows OSFI’s January 2020 consultative document Advancing Proportionality and July 2019 discussion paper Advancing Proportionality: Tailoring Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions.

All banks and federal trust and loan companies, other than the six D-SIBs, are considered SMSBs and are to be segmented into three categories as follows:

  • Category I: SMSBs reporting more than C$10-billion in total assets (excluding D-SIBs)

  • Category II: SMSBs with less than C$10-billion in total assets that report more than C$100-million in total loans

  • Category III: SMSBs with less than C$10-billion in total assets that report less than C$100-million in total loans.

Category I effectively captures medium-sized institutions, Category II captures small lenders, and Category III captures non-lenders (with loans below C$100-million effectively operating as a materiality threshold for lending). This segmentation will be based on asset and loan amounts calculated at the end of each fiscal year and reported in OSFI’s M4 monthly Balance Sheet return for each of the previous 12 months. Once an institution migrates to a new category, it must remain in the new category for a minimum of two fiscal years. Foreign bank branches are not included in these categories as they are not subject to the requirements under the CAR, LR and LAR.

Notwithstanding the segmentation criteria, OSFI has discretion to move an institution into a different category based on changes to an institution’s business model and activities not yet reflected in its balance sheet.

Subsidiaries of D-SIBs will be considered to be in Category I for the purposes of capital and liquidity requirements. Subsidiaries of SMSBs will be subject to the same capital and liquidity requirements as the parent institution. New SMSBs will be categorized based on the planned activities and balance sheet in the institution's business plan.

The SMSB Guideline includes separate sections for each category of SMSB that describe applicable capital and liquidity requirements, including references to the relevant sections of CAR, LR and LAR.

During the April 8, 2021 information session, OSFI stressed that the new SMSB Guideline is not intended to replace the internal capital adequacy assessment process (ICAAP) for SMSBs. OSFI will expect SMSBs to continue developing and implementing a comprehensive ICAAP and to maintain internal capital thresholds consistent with the ICAAP assessment. OSFI also stated that the Simplified Risk Based Capital Ratio for Category III SMSBs, referenced below, is meant to simplify and streamline the calculation of capital requirements but not to necessarily reduce capital levels for these SMSBs.

For more detail on the capital and liquidity requirements applicable to each SMSB category, see the table below.

Summary of SMSB Capital and Liquidity Requirements by Category



OSFI Guideline

Category I

Category II

Category III


Risk-based capital

Risk-Based Ratios
CAR Chapters 1-2

Capital ratios for:

  • Common Equity Tier 1 (CET 1)

  • Tier 1 Capital

  • Total Capital


Simplified capital ratios for:

  • CET 1

  • Tier 1 Capital

  • Total Capital


Operational Risk
CAR Chapter 3

  • Standardized Approach (where adjusted gross income exceeds C$1.5-billion or otherwise with OSFI approval) or

  • Simplified Standardized Approach

Simplified Standardized Approach

Credit Risk
CAR Chapters 4-8

  • Internal Ratings-Based (with OSFI approval) or

  • Standardized Approach with simplified treatment available for certain asset classes

Standardized Approach with simplified treatment available for certain asset classes


Market Risk (OSFI to advise if applies)
CAR Chapter 9

  • Internal Models (with OSFI approval) or

  • Standardized Approach


Leverage Ratio


Leverage Ratio

No Leverage Ratio


Liquidity Coverage Ratio (LCR)

LAR Chapter 2



Cash Flow- Based Requirement

LAR Chapter 4/ 5

Comprehensive NCCF

Streamlined NCCF
(unless OSFI directs otherwise)

Operating Cash Flow Statement

Net Stable Funding Ratio (NSFR)

LAR Chapter 3

Only for SMSBs with significant wholesale funding reliance
(funding 40 per cent or more of total on-balance sheet assets with wholesale funding sources)



In addition to introducing the draft SMSB Guideline, OSFI proposes to update the CAR to align with the final round of Basel III reforms. Proposed changes to the CAR include:

  • implementation of a 72.5 per cent Basel III output floor for institutions using an internal ratings-based approach (to be phased in over three years starting 2023);

  • new deductions from CET 1 capital for certain exposures;

  • domestic implementation of the Basel III Standardized Approach for operational risk and a new Simplified Standardized Approach available for SMSBs;

  • new market risk capital rules, consistent with the Basel Committee’s Fundamental Review of the Trading Book; and

  • a minimum coverage threshold for use of the Internal Model Approach for market risk.

Corresponding changes to the LR are proposed to align it with the revised CAR.

OSFI has proposed changes to the LAR to improve risk sensitivity and provide for sufficient liquid investment to support contingent liquidity demands and continued lending during periods of financial stress. The proposed changes to the LAR include revisions to the Net Cumulative Cash Flow (NCCF) requirements to improve the recognition of cash flows related to asset growth and operational expenses, and a shortened timeline for reporting NCCF to OSFI for non-direct clearers.

The proposed changes to the Pillar 3 Disclosure Guideline aim for greater transparency on capital, leverage and liquidity positions of D-SIBs and provide for consistent disclosure compared to international peers.

OSFI is requesting feedback on the CAR, LR, LAR and SMSB Guidelines by June 4, 2021, and by July 2, 2021 for feedback on the Pillar 3 Disclosure Guideline.
For further information, please contact:
Paul Belanger                        416-863-4284
Ora Morison                          416-863-2712
Vladimir Shatiryan               416-863-4154

or any other member of our Financial Services Regulatory group.