Basel IV and proportionality initiatives

Basel IV and proportionality initiatives

Upcoming changes to the Canadian capital and liquidity framework



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Canadian banks are currently faced with the challenge of implementing the final Basel III reforms, informally known as 'Basel IV' by Q1-2022. While the majority of public dialogue around Basel implementation focuses on large, internationally active banks, OSFI recently published its proposals for tailoring capital and liquidity requirements for small and medium-sized deposit-taking institutions' (SMSBs) in a July 2019 discussion paper titled Advancing Proportionality. The SMSB category includes domestic banks and credit unions, foreign bank subsidiaries, and trust and loan companies

Summary of OSFI's Proportionality Initiatives

Each of the 66 SMSBs regulated by OSFI will be segmented into four categories based on pre-defined criteria that will determine the exact nature of their respective Pillar 1 capital and liquidity requirements.

OSFI has proposed segmenting SMSBs based on the following criteria:

  1. IRB approval status (reflecting sophistication of use of ratings, corporate governance and internal controls)
  2. Size of on-balance sheet assets
  3. Size of assets under management (AUM) or assets under administration (AUA)
  4. Supervisory judgement

Based on these criteria, a draft segmentation scheme has been developed which stratifies SMSBs into four proposed categories:

  • Category 1 (with OSFI approval to use the IRB approach for credit risk)
  • Category 2 (with > $10B in assets)
  • Category 3 (with assets of $0.5B to $10B or >$20B in AUA/AUM)
  • Category 4 (with ≤ $0.5B in assets and ≤ $20B in AUA/AUM)

The second phase of OSFI's proportionality initiatives focusing on Pillar 2 and Pillar 3 requirements is scheduled to begin by mid-2020 and a final set of rules should be published by December 2020. The final set of revised requirements will be effective in Q1-2022.

OSFI's proposed proportionality initiatives reflect a common emphasis across all Basel member jurisdictions to strike an appropriate balance by enhancing standards in a way that improves banks' resilience to financial risks, while ensuring the relevance and appropriateness of standards to smaller institutions.

Understanding the impact of Basel IV and Proportionality

KPMG believes that it is important for SMSBs to understand the potential impact of the upcoming OSFI proportionality initiatives and incorporate them into their existing plans for implementing the final Basel III reforms. The scope of their Basel IV implementation efforts will depend on their categorization within the SMSB segmentation scheme. Furthermore, factors like business growth (e.g. growth in assets, AUA, or AUM), IRB approval status, and even supervisory judgement can result in a SMSB's categorization and increased requirements. Our publication, Basel IV and proportionality initiatives, explores these challenges in further detail.

How KPMG can help SMSB clients with Basel IV Implementation

It is clear that Basel IV is a key priority for all banks, however a standard approach does not apply for both D-SIBs and SMSBs. OSFI's proposed proportionality initiatives present SMSBs with unique considerations and challenges that impact both their regulatory implementation and plans for shaping their business models and growth plans. KPMG can help DTIs implement, interpret and perform gap analyses for the Basel IV regulations and identify synergies and optimization initiatives on the institution's required implementation efforts. KPMG can also provide support across the end-to-end implementation efforts from rules interpretation, data and systems, model development to independent review, and regulatory reporting.


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