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Update on OSFI proportionality initiatives

Update on OSFI proportionality initiatives

Pillar 1 capital and liquidity rules for SMSBs

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Craig Davis

Partner, Advisory, Risk Consulting

KPMG in Canada

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​OSFI continues to move towards finalizing draft capital and liquidity requirements for small and medium-sized deposit-taking institutions (SMSBs) by the end of 2020. Subsequent to the publication of its July 2019 discussion paper, Advancing Proportionality, OSFI has made revisions in response to stakeholder feedback. These revisions are summarized in a consultative document on SMSB Capital and Liquidity Requirements that was published by OSFI on January 17, 2020.

Summary of OSFI's proposed revision

In response to stakeholder feedback, OSFI has made the following modifications:

  1. Categorization of SMSBs
  2. Treatment of credit risk and operational risk
  3. Capital requirements for non-lenders
  4. Liquidity requirements for non-lenders

1. Categorization of SMSBs

OSFI proposes three categories for SMSBs:

  • Category 1: Medium-sized Institutions (with assets > $10B)
  • Category 2: Small Lenders (with assets ≤$10B and total loans >$100M)
  • Category 3: Non Lenders (with assets ≤$10B and total loans ≤$100M).

2. Treatment of credit risk and operational risk

OSFI proposes:

  • A single standardized approach for credit risk, which permits a more risk-sensitive treatment and a simplified treatment for immaterial asset classes.
  • A simplified version of the revised standardized approach1 for operational risk as the default approach for all SMSBs.
  • Category 1 institutions will be permitted to apply more sophisticated approaches (i.e. Internal Ratings Based (IRB) for credit risk and the revised standardized approach for operational risk) subject to meeting OSFI's requirements.

3. Capital Requirements for Non-Lenders (category 3)

OSFI proposes a simplified risk-based capital ratio for non-lenders:

(CET1 capital) / (Total Assets (less deductions from capital) + Operational RWA) ≥ 10.5%

4. Liquidity Requirements

  • Category 1 - Medium-sized institutions are required to report both the Liquidity Coverage Ratio (LCR) and Net Cumulative Cash Flow (NCCF), and will report the Net Stable Funding Ratio (NSFR) only if they significantly rely on wholesale funding sources.
  • Category 2 - Small lenders are required to calculate and report the LCR, as well as a streamlined NCCF metric.
  • Category 3 - Non-lenders are required to calculate the Operating Cash Flow Statement (OCFS) metric, a new measure tailored to their unique business activities.

Understanding the impact of Basel IV and Proportionality

KPMG believes that it is important for SMSBs to stay engaged and up to date with the evolution of OSFI's proposed proportionality initiatives. Industry feedback has already resulted in changes to the SMSB segmentation scheme, credit and operational risk approaches, as well as the format of capital and liquidity requirements. Our publication explores these changes in further detail, and identifies the key changes made since the publication of our first article from December 2019.

How KPMG can help SMSB clients with Basel IV Implementation

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.

Let's do this.

1 Previously referred to by OSFI as the standardized measurement approach, or SMA

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