Regulator puts banks on fast track for new capital rules

TORONTO Canada’s top banking regulator is pushing the country’s largest financial institutions toward faster adoption of new riskbased capital rules than their international counterparts.

Analysts expect the changes, intended as an interim step to a fiveyear phase-in by the international banking community beginning in 2022, to provide a near-term benefit to most of Canada’s biggest banks by giving them slightly more flexibility when it comes to their capital requirements.

“We work hard to influence the direction of international standards so they are fit for purpose in the Canadian context ...,” Carolyn Rogers, assistant superintendent of financial institutions at the Office of Superintendent of Financial Institutions, said in a speech this week. “But we have also learned to not hesitate to make adjustments to international standards where we feel they are necessary to meet Canada’s objectives.”

One of the capital rules OSFI is updating this year, as it prepares final implementation plans for the global regulatory framework known as Basel III, involves the way banks measure a so-called “output floor” — a standard implemented in 2008 to make sure the level of capital held by banks that rely on internal models does not fall below a prescribed level.

Under the Basel framework, banks don’t have to begin phasing in a new, more risk-sensitive standardized approach until the year 2022, but Rogers says the current rule is already “showing its age” by using definitions of capital and risk-weighted assets that are more than 10 years old and are significantly less risk sensitive.

Leaving the existing rules in place for another 10 years has operational risks for Canadian banks, and risks distorting incentives OSFI views as critical to creating a credible capital regime, she said.

As a result, Canadian banks will begin the transition to the new risk-based standard next quarter, and finish in the fourth quarter of this year.

Under the old approach, banks’ risk-weighted assets were required to be at least 90 per cent of what they would have been using standardized models. If they fell below that Basel 1 “output floor,” the backstop was triggered requiring them to make a capital adjustment. The new approach calls for the floor to be “calibrated at 75 per cent,” she said.