The Office of the Superintendent of Financial Institutions says that U.S. regulators’ plans to delay the implementation of the revised capital adequacy regime, known as Basel II, should not affect the Canadian banks’ adoption of Basel II.

The four U.S.federal banking agencies recently announced revised plans for the U.S. implementation of the new Basel capital framework. OSFI says that Canadian banks have asked whether the U.S. announcement impacts OSFI’s current plans for implementing the new framework in Canada. “OSFI believes that the Basel II implementation date should not change in Canada,” it says.

OSFI says that its conclusion reflects key differences between Canada’s approach and the US approach to implementation. The U.S. proposal has only allowed one advanced option for their banks. Canada does not require banks to follow one approach to credit risk. Also, contrary to the U.S., Canada has provided more flexibility in migrating bank loan portfolios to the advanced approaches. And, OSFI’s draft capital rules, implementation process and other tools, provide a number of additional alternatives that may be used to address shortfalls in implementation. The alternatives include the use of simpler more conservative assumptions under the new capital framework and possibly the requirement for disclosure to shareholders.

Similarly, given the strong risk management systems promoted by Basel II, it continues to be OSFI’s expectation that large domestic banks implement the Advanced Internal Ratings Based (AIRB) approach for all “material” portfolios and credit businesses in Canada and the U.S. by fiscal year-end 2007.

OSFI says it will continue to monitor ongoing implementation efforts against agreed rollout plans and in this context will review the results of the parallel run reports with individual institutions.

“Depending on the results of these efforts, OSFI may need to explore alternatives within our implementation approach for addressing any individual bank concerns prior to the implementation date,” it says. “In addition, the review of the asset to capital multiple for individual banks is linked to the bank’s readiness for implementation of the AIRB on the implementation date.”

OSFI says it believes that information obtained during the parallel reporting period will be essential to the evaluation of the progress that banks are making towards internal implementation of the framework. For banks adopting the AIRB approaches, parallel reporting continues to be required for five quarters, beginning with data for the fourth quarter of fiscal year 2006 and ending with the fourth quarter of fiscal year 2007.

“Concerning floors, OSFI continues to expect banks applying an [internal ratings-based] approach for credit risk and/or an [advanced measurement approach] for operational risk to apply a capital floor of 90% and 80% of the current capital adequacy requirements in the fiscal years 2008 and 2009 respectively,” it adds.