Federal financial regulators have published the final version of new capital adequacy rules for banks, implementing the reform known as Basel III for Canadian banks, even as other jurisdictions face delays.
The Office of the Superintendent of Financial Institutions (OSFI) issued updated capital adequacy guidelines Monday, which would implement the Basel III capital rules in Canada. The guideline, which governs capital rules for banks, trust and loan companies and cooperative retail associations, takes effect Jan. 1, 2013.
OSFI notes that the Basel agreement allows for a lengthy phase-in period, but it’s adopting the requirements early “due to the relatively strong position of Canadian banks and the benefits associated with early adoption.”
“The issuing of this guideline is a significant milestone in meeting international commitments to improving global capital standards as set out in Basel III,” said Mark Zelmer, assistant superintendent, regulation sector. “Canadian banks are well positioned to meet the 2019 Basel common equity capital requirements at the beginning of 2013. This is six years ahead of schedule and speaks to their prudence and resilience.”
In a letter accompanying the new guidelines, OSFI says that it recognizes there will be delays in the implementing these standards in the US and Europe, but it stresses that “in both cases authorities are fully committed to implementation”. And, for the most part, it says that the delays do not present a material disruption to the level playing field between different countries.
The notable exception to that is where Credit Valuation Adjustment capital charges are concerned. As a result, OSFI is delaying the application of that measure. “The bilateral [over-the-counter] derivative market is a global market for Canadian banks and given the significant impact of the CVA add-on charge, we believe a coordinated start with the two most significant jurisdictions in the global derivatives market is warranted,” it says.
So, it has decided that those provisions won’t come into effect until January 1, 2014 “in order to avoid a potential disruption to this important bilateral global market that could result from an asynchronous implementation.”
OSFI issued a draft guideline in August for public consultation and the revised guidance incorporates many of the comments received. However, it rejected a call to recalibrate the maximum assets to capital multiple. According to OSFI, commenters argued that changes in the definition of capital will increase banks’ ACM without a corresponding increase in risk taking.
“Higher maximum ACM would allow banks to absorb the change to the definition of capital, and put banks in a better position to deal with the complications arising from managing the phase-out of existing Tier 2 capital, while planning for the ultimate transition to the new Tier 1-based Basel III Leverage Ratio,” it notes commenters said.
However, OSFI concluded that it would be prudent to increase the multiple “given the Basel III leverage ratio is still under review and as we move towards public disclosure of the leverage ratio in 2015 and implementation in 2018.”
In addition to altering the capital rules, OSFI is also restructuring the guideline, consolidating its two parts into a single guideline and presenting each chapter as a separate document with a detailed table of contents.