Canada’s financial watchdog plans to revise capital requirements for the nation’s banks, drafting more risk-sensitive interim rules while moving faster toward adopting new criteria set by global regulators.
The Office of the Superintendent of Financial Institutions’ Carolyn Rogers announced the changes Tuesday during a speech at a conference hosted by RBC Capital Markets in Toronto. She said Canadian banks would have until the fourth quarter to conform to an interim risk model that transitions toward capital standards announced in December by the Basel Committee on Banking Supervision.
“We are strong advocates of the value of international standards in Canada but we have also never shied away from deviating from those standards where it makes sense in our domestic market,” said Rogers, the OSFI’s assistant superintendent.
“In some cases those deviations result in higher standards or tighter transition timelines.”
Rogers said she expects a faster transition to Basel III rules that restrict how low banks can drive their capital requirements by gauging asset risk with their own statistical models.
In Canada, banks’ total assets weighted for risk using their own models can’t be less than 75 per cent of the amount calculated with a formula provided by the regulators, under the interim Basel II plan announced by Rogers. That interim plan comes into effect over this fiscal year.
“With a new output floor in place that we expect to bridge us to the Basel III floor, our focus will be on mapping the rest of the transition plan to bring the final set of Basel III reforms into Canada,” Rogers said.
Under Basel III, which uses a different formula, the so-called output floor starts at 50 per cent in 2022 and phases in to the final level of 72.5 per cent over five years. The 10-year timeline is “unnecessarily long,” and delaying the start and stretching out implementation doesn’t send as clear message of safety and soundness, Rogers said in Tuesday’s speech.
“We moved faster on the first round of Basel III capital rules, and it served the Canadian market and Canadian banks well,” Rogers said Wednesday during an interview in her Toronto office. “You can expect we’ll move faster on the final round as well.”
The Canadian Bankers Association, which represents the country’s banks, endorsed the plan.
“Canada’s banking sector has been a strong proponent of risk-sensitive approaches to capital standards,” the association said in an emailed statement. “We support the move by OSFI to integrate greater risk sensitivity into the floor.”