PILLAR | June 2018 OSFI 1 The OSFI PILL June 2018 AR From the Office of the Superintendent of Financial Institutions In this issue Communicating Capital Speech: Covered bonds in Canada Total Loss Absorbing Capacity Communicating Capital OSFI to make more information available on capital requirements for Canada’s largest domestic banks Canadian banks have long been identified as being among the most strongly capitalized banks in the world. In fact, robust capital levels are often cited as the primary reason for the relatively strong performance of Canadian banks during the 2007-2008 global financial crisis. Similar to how many people set some money aside for emergencies and unexpected events, banks also set aside capital in a buffer when times are good so it will be available when times are not as good. An effective capital regime ensures that banks are holding adequate capital in their buffers to protect against risks, while encouraging them to use their buffers during times of stress to avoid fire sales of assets or drastic reductions in lending. In the decade since the financial crisis, bank regulators have spent a lot of time designing capital safeguards aimed at preventing contagion and other risks in the banking system. The current international capital framework, known as Basel 3, does a much better job of protecting the solvency of banks than in the past. Under Basel 3, increases in both the quantity and quality of capital that banks are now obliged to hold means they are better guarded against risks than they were before the financial crisis. D-SIB CET1 Capital [ More information on capital requirements for regulated financial institutions is available on the OSFI website ] Minimum CET1 Capital Requirement 0 2 4 6 9.5 8 % Capital Conservation Buffer D-SIB Surcharge Domestic Stability Buffer
Transcript
PILLAR | June 2018 OSFI 1
The OSFIPILLJune 2018
ARFrom the Office of the Superintendent
of Financial Institutions
In this issue
Communicating Capital
Speech: Covered bonds in Canada
Total Loss Absorbing Capacity
Communicating CapitalOSFI to make more information available on capital requirements for Canada’s largest domestic banks
Canadian banks have long been identified as being among the most strongly capitalized banks in the world. In fact, robust capital levels are often cited as the primary reason for the relatively strong performance of Canadian banks during the 2007-2008 global financial crisis.
Similar to how many people set some money aside for emergencies and unexpected events, banks also set aside capital in a buffer when times are good so it will be available when times are not as good. An effective capital regime ensures that banks are holding adequate capital in their buffers to protect against risks, while encouraging them to use their buffers during times of stress to avoid fire sales of assets or drastic reductions in lending.
In the decade since the financial crisis, bank regulators have spent a lot of time designing capital safeguards aimed at preventing contagion and other risks in the banking system.
The current international capital framework, known as Basel 3, does a much better job of protecting the solvency of banks than in the past. Under Basel 3, increases in both
the quantity and quality of capital that banks are now obliged to hold means they are better guarded against risks than they were before the financial crisis.
D-SIB CET1 Capital
[ More information on capital requirements for regulated financial institutions is available on the OSFI website ]
At the national level, several countries have supplemented the Basel 3 international capital framework with capital buffers aimed at domestic stability. Regulators in the United Kingdom, Switzerland and Sweden, among others, have additional buffers in place to protect against vulnerabilities facing their large banks at home.
Similarly, the Office of the Superintendent of Financial Institutions (OSFI) requires Canada’s six largest banks, known as the domestic systemically important banks, or D-SIBs, to hold a capital buffer (domestic stability buffer) against primarily domestic risks. The level of capital OSFI requires banks to set aside in this domestic stability buffer, currently set at 1.5% of a bank’s risk-weighted assets, is based on its assessment of a number of indicators, combined with its supervisory judgement.
Amounts held in the domestic stability buffer are increased when OSFI is of the view that it would be prudent for the banks to hold additional capital to protect against growing risks. The buffer amount can also be decreased when OSFI is of the view that D-SIBs’ exposures to the vulnerabilities have diminished.
The global financial crisis saw confidence in some banks fall even though they were reporting strong capital levels. This made clear the importance of banks not only holding adequate capital against their risks, but also providing information to the market on what risks capital buffers are protecting against.
With the goal of making more information available on its domestic stability buffer and the related risks, OSFI will be making some changes. In the past, certain capital requirements for domestic risks have been communicated to Canada’s largest banks privately. Capital requirements for the domestic stability buffer and the related risks will soon be communicated publicly, each June and December, through postings to OSFI’s website.
Not only will this give more insight into the overall amount of capital being set aside by the banks, it will contribute to broader financial stability by providing information on the key domestic risks to which Canada’s largest banks are exposed. Examples of risks that the domestic stability buffer is intended to protect against could include Canadian consumer and institutional indebtedness, or any other risks that could have a system-wide impact.
While the intention is to make domestic stability buffer level decisions on a scheduled basis, OSFI may adjust the buffer at any time.
OSFI is mandated to monitor for system-wide developments that could have an impact on the financial institutions it regulates. By providing additional information on the capital held by Canadian banks, OSFI seeks to further strengthen the Canadian financial system – a system in which all Canadians can continue to place their trust.
Advisory on IFRS Transition and Progress Report RequirementsOn May 4, 2018, OSFI issued an advisory for federally regulated insurers and insurance holding companies in their transition to International Financial Reporting Standard (IFRS) 17.
The advisory communicates OSFI’s expectations regarding the option for early adoption of IFRS 17, accounting for financial guarantee contracts and semi-annual progress reporting to OSFI.
Discussion paper on ReinsuranceOn June 8, 2018, OSFI issued a discussion paper as part of its review of the reinsurance framework applicable to federally regulated insurers. The discussion paper seeks industry feedback on proposals designed to enhance and maintain an effective framework for reinsurance in Canada. Comments on the discussion paper may be emailed by September 15, 2018, to: [email protected].
Covered Bonds in Canada: Remarks by Superintendent Jeremy Rudin
On April 18, 2018, Superintendent Jeremy Rudin delivered remarks to the European Covered Bond Council in Vancouver where he explained OSFI’s role in the covered bond market. Following are some key excerpts:
The global financial crisis taught us many lessons; one of them was the importance for banks to have a wide range of funding sources so that they can remain viable in times of stress.
Covered bonds are debt securities issued by a financial institution that are collateralized against a pool of assets designed to cover claims should an issuer fail. As opposed to asset-backed securities that are created in a securitization and are no longer ‘on the books’, covered bonds continue as obligations of the issuer. This means the investor has recourse against both the issuer and the pool of cover asset, often known as ‘dual recourse’.
Canadian banks only began issuing covered bonds in 2007, and in a short period they have become a valuable funding source for lenders. Since issuing the first Canadian covered bond, total issuance has exceeded $200 billion and the level of outstanding debt has been steadily increasing.
So, where does OSFI fit in? We at OSFI support the integrity of the covered bond framework in three ways:
1. A major part of our mandate is to protect the interests of depositors and other creditors to banks, so we keep a close eye on the safety and soundness of the banks that issue Canadian covered bonds.
2. We set a limit for issuance of covered bonds by each bank to ensure that the financial stability benefits of covered bonds are not dissipated by excessive issuance.
3. We play a role in ensuring the soundness of the cover assets themselves.
In order to ensure that the financial stability benefits of covered bonds are not dissipated by excessive issuance, OSFI has applied a cap on issuance of four per cent of a bank’s total assets.
We are now taking a hard look at this limit and we are doing so in the context of our expectations on the banks’ overall management of asset encumbrance.
Any revisions that we might make to our approach must encourage banks to maintain enough unencumbered, high-quality assets when times are good to be able to meet both higher collateral requirements, and broader funding needs, if times turn sour.
We will continue to support the integrity of the Canadian covered bonds framework by keeping a close eye on the safety and soundness of the banks that issue covered bonds in Canada and ensuring that a prudential limit for issuance of covered bonds prevents excessive issuance and so safeguards the resiliency of banks in times of stress.
Total Loss Absorbing Capacity On April 18, 2018, OSFI released the Total Loss Absorbing Capacity (TLAC) guideline for Canada’s domestic systemically important banks (D-SIBs).
Then on May 28, 2018, OSFI issued the final versions of its guidelines on Total Loss Absorbing Capacity (TLAC) Disclosure Requirements and Capital Disclosure Requirements.
Together, these guidelines are a key element of a TLAC regime designed to ensure Canada’s largest banks maintain a minimum capacity to absorb losses and enhance stability within the financial sector.
TLAC requirements are designed to ensure a D-SIB has sufficient loss absorbing capacity to support its recapitalization in the unlikely event of a failure. This additional loss absorbing capacity would facilitate an orderly resolution of a bank and allow it to remain open and operating without requiring public funds or threatening financial stability.
Domestic systemically important banks should publicly disclose TLAC information commencing with the quarterly reporting period ending January 31, 2019. The Capital Disclosure Requirements guideline, which applies to all federally regulated deposit-taking institutions, has been updated to remove transitional guidance that is no longer applicable.
The Capital Adequacy Requirements (CAR) guideline has been revised to incorporate investments in TLAC instruments by banks. These revisions will be effective as of the first fiscal quarter of 2019.
Draft LICAT Guideline On June 1, 2018, OSFI issued a draft 2019 Life Insurance Capital Adequacy Test (LICAT) guideline for comment. Proposed changes include consequential amendments to reflect the adoption by insurers of IFRS 16 – Leases, the addition of conditions for recognition of funds withheld reinsurance, and the application of mortality risk components to any group life insurance products.
LICAT Public Disclosure RequirementsOn March 29, 2018, OSFI issued the final version of its Life Insurance Capital Adequacy Test Public Disclosure Requirements guideline. Through the promotion of simple, useful and comparable public disclosures, the guideline enhances transparency and encourages prudent behaviour through market discipline. The guideline applies to federally regulated life insurance companies (including fraternal benefit societies) and insurance holding companies and is effective for the period ending December 31, 2018.
Updates from the Office of the Chief Actuary (OCA) In Berlin, Germany, on June 5, Chief Actuary Jean-Claude Ménard delivered a presentation to the 31st International Congress of Actuaries entitled Assessing the Sustainability of the Canada Pension Plan through Actuarial Balance Sheets.
The 29th Actuarial Report on the Canada Pension Plan as at December 31, 2015, was tabled before Parliament on May 1, 2018.
On April 12, 2018, Chief Actuary Jean-Claude Ménard delivered a Presentation to the Board of the National Association of Federal Retirees on enhancements to the Canada Pension Plan and actuarial reporting for federal public sector pension plans.
On April 10, 2018, the OCA released an actuarial study entitled Measuring and Reporting Actuarial Obligations of the Canada Pension Plan: Actuarial Study No. 19.
View updates from the Office of the Chief Actuary.
Pension guidance On March 21, 2018, OSFI issued a revised Guide to Federally Regulated Private Pension Plans. The guide was primarily revised to clarify what typically occurs at each stage rating, including the degree of supervisory actions or interventions that plan administrators could expect OSFI to take. OSFI took into account circumstances of non-compliance, best practices and bankruptcy during the review of this guide.
On March 28, 2018, OSFI issued a new guidance note for member choice defined contribution pension plans. It sets out OSFI’s interpretation and expectations relating to the requirements for the investment option selected by the plan administrator as the default investment option.
On March 29, 2018, OSFI also issued two guidance notes related to pension plan asset transfers. Asset Transfers related to Defined Contribution Provisions of Pension Plans and Asset Transfers related to Defined Benefit Provisions of Pension Plans.
Notice of changes to minimum base assessments On March 26, 2018, OSFI issued a letter to advise federally regulated financial institutions of changes to its minimum base assessments.
Instruction Guide for Pension Plans OSFI has posted a revised Instruction Guide to assist administrators of pension plans registered, or having filed an application for registration under the Pension Benefits Standards Act, 1985, in completing the Certified Financial Statements (OSFI 60 or CFS) and submitting an auditor’s report.
The revised Instruction Guide and accompanying form updates the previous one published in February 2013.
The revisions follow a regular review of guidance documents and include changes to the guide (and form) for consistency with the Regulatory Reporting System (RRS), clarity regarding filing requirements, and formatting changes.
OSFI’s 2018-19 Departmental PlanOn April 16, 2018, OSFI’s Departmental Plan was tabled in Parliament. This report provides parliamentarians and Canadians with information on OSFI’s activities and the results it will strive to achieve during the coming year.
The OSFI Pillar is published by the Communications and Consultations Division of the Office of the Superintendent of Financial Institutions.
For more information on the articles in this issue, or to provide feedback, please e-mail OSFI Communications at: [email protected].
