The Office of the Superintendent of Financial Institutions has issued a draft advisory setting out its new, beefed up expectations for banks’ securitization activities.

In an accompanying letter to firms, OSFI says that the new guidance follows three themes: capital charges for liquidity facilities and other securitization activities need to accurately reflect firms’ risks; firms need to carefully assess the risks arising from securitization structures and their assets and must exercise caution when relying on external credit ratings; and more capital is required to support complex securitization exposures such as resecuritizations.

In the new draft advisory, there are seven key areas where existing guidance is being reinforced or changed:

> OSFI’s expectations regarding the establishment and review of exposure limits for securitizations, the need for stress testing and consideration of risk correlations;

> the zero per cent credit conversion factor for general market disruption liquidity facilities is being eliminated, effective immediately, and such facilities will receive the same capital treatment as global style liquidity facilities;

> firms are expected to ensure that short-term liquidity facilities are indeed short term exposures and, if not, they should be establishing higher capital charges to support such facilities;

> sponsorship roles that firms may play with respect to a securitization special purpose entity and the impact of those roles on reputational risk are clarified;

> effective September 15, two external credit assessments will be required to apply ratings-related risk weights to most securitization exposures;

> additional guidance is being provided with respect to implicit support of SPEs; and

> additional risk assessment practices are encouraged for re-securitization exposures and the risk weights applicable to re-securitizations are being increased.

OSFI notes that further guidance in this area may be forthcoming to address changes in international capital rules or market developments.

Comments are due by July 31, and the final version will take effect on September 15.