The Office of the Superintendent of Financial Institutions has issued final capital adequacy guidelines for banks under Basel II.

On March 31, OSFI released for industry consultation draft Capital Adequacy Requirements guidelines. It is now releasing the final versions, reflecting the guidance of the Basel Committee on Banking Supervision and comments submitted on the draft versions.

The guideline A contains the requirements pertaining to the simpler approaches under the Basel II framework, the Standardized Approach to credit risk and the Basic Indicator Approach and Standardized Approach to operational risk.

Guideline A-1 applies to institutions that have been approved to implement the Internal Ratings Based (IRB) and Advanced IRB approaches to credit risk and the Advanced Measurement Approaches (AMA) to operational.

These guidelines are provided for banks to use during the parallel reporting period commencing Nov. 1, 2007, and are expected to come into force on Nov. 1, 2007 and Jan. 1, 2008, the Basel II implementation date for Canadian banks. However, the existing guideline A (parts I and II) will be maintained subsequent to the implementation of Basel II because the revised guidelines rely on the existing guideline for the determination of capital floors during the transition period.

The final guidelines include the following major changes from the previous draft: detailed guidance on transitional arrangements for banks that do not obtain full approval to use one of the IRB approaches; a mapping of rating agency short-term grades to the risk weights under the standardized risk weighting framework; requirements for Advanced IRB banks that reflect guarantees through LGD adjustments; and, additional guidance on the Advanced Measurement Approaches to operational risk, specifically the treatment of expected losses.