Federal banking regulators have issued their plan for implementing the Basel III capital adequacy and liquidity requirements in Canada.

The Office of the Superintendent of Financial Institutions said Tuesday it plans to revise capital adequacy guidelines and reporting forms, and it will consider the need for additional guidance on disclosure requirements by the end of 2012, for implementation in the first fiscal quarter in 2013.

OSFI expects to start consultation on the revisions, pending completion of some final details by the Basel committee. OSFI notes that its interpretation of the Basel capital rules will be established following its normal procedures for amending its capital guidelines.

“Until we observe further international and market developments or engage in such consultations, we expect OSFI’s minimum requirements to follow the Basel III transition plan and [banks] are expected to have in place and pursue internal capital plans and targets that will enable them to meet the Basel III capital requirements,” it says.

OSFI also notes that its expectations for sound capital management, as spelled out in advisory issued last September, still apply. In particular, banks that are below the 7% common equity Tier 1 target should, “with a view to meeting the capital conservation buffer as soon as reasonably possible, maintain prudent earnings retention policies and avoid actions that weaken their capital position.”

OSFI says that a combination of sound capital management and the international guidance on prudent earnings retention will result in the banks meeting the 2019 Basel III capital requirements early in the transition period.

A new leverage ratio is also to be adopted, which will also have consequences for OSFI’s existing leverage limits. The Basel III international leverage ratio is to be adopted in 2018, but is subject to an observation period ending in 2015. OSFI says that while it will be considering whether changes to its ratio are appropriate in the near future to streamline reporting, it does not expect to begin consulting the industry on its implementation until the Basel III leverage ratio has been substantially finalized.

The new international rules on bank liquidity will require OSFI to amend its liquidity guideline, “to reflect enhanced guidance on sound practices for liquidity risk management and to introduce new minimum quantitative standards for liquidity risk in time for implementation at the beginning of 2015”, to be fully implemented by 2018.

OSFI intends to begin consultation on that issue during 2011, incorporating new Basel III liquidity rules. It will also begin immediately to review liquidity reporting requirements. “However, as the implementation of the Basel III quantitative liquidity rules is subject to observation periods, when OSFI is making revisions to its current liquidity guidance based on the current Basel III liquidity rules text, it will consider whether it is prudent to await the completion of the observation periods and any subsequent revisions, and whether implementation is likely to have material unintended consequences, before implementing those quantitative standards,” OSFI says.

IE