Chapter 1 - Overview.pdf

7/27/2019 Chapter 1 - Overview.pdf

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GuidelineSubject: Capital Adequacy Requirements (CAR)

Chapter 1Overview Effective Date: January 2013

Subsection 485(1) of theBank Act(BA) and subsection 473(1) of the Trust and Loan CompaniesAct(TLCA) require banks and trust and loan companies to maintain adequate capital. The CARGuideline is not made pursuant to subsection 485(1) of the BA or to subsection 473(1) of theTLCA. However, the capital standards set out in this guideline provide the framework withinwhich the Superintendent assesses whether a bank or a trust or loan company maintains adequatecapital pursuant to the Acts. For this purpose, the Superintendent has established two minimumstandards: the assets to capital multiple, and the risk-based capital ratio. The first test provides anoverall measure of the adequacy of an institution's capital. The second measure focuses on riskfaced by the institution. Notwithstanding that a bank or a trust or loan company may meet thesestandards, the Superintendent may direct a bank to increase its capital under subsection 485(3) ofthe BA, or a trust or loan company to increase its capital under subsection 473(3) of the TLCA.

Canada, as a member of the Basel Committee on Banking Supervision, participated in thedevelopment of the capital framework, includingBasel II:International Convergence of CapitalMeasurement and Capital Standards: A Revised FrameworkComprehensive Version (June2006) andBasel III: A global regulatory framework for more resilent banks and bankingsystems. This domestic guidance is based on the Basel II and III frameworks. It also includes

updates of relevant parts of the 1988 Basel Accord and the 1996 amendment to the Accord thatsets out a framework for calculating the capital requirements for market risk. This guideline alsoreflects changes to both the Basel II and market risk frameworks that have occurred since theiroriginal implementation.

Where relevant, the Basel II and III paragraph numbers are provided in square brackets at theend of each paragraph referencing material from the Basel II and III frameworks. Some chaptersinclude boxed-in text (called OSFI Notes) that set out how certain requirements are to beimplemented by Canadian banks and trust and loan companies.

From time to time, OSFI will issue capital implementation notes to clarify supervisors

expectations on compliance with the technical provisions of the internal ratings based approachset out in chapter 6 of this Guideline.


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Banks/BHC/T&L Overview

January 2013 Chapter 1 - Page 2

Chapter 1- Overview

The Capital Adequacy Requirements (CAR) for banks and trust and loan companies are set outin nine chapters, each of which has been issued as a separate document. This document, whichcontains Chapter 1Overview, should be read in conjunction with the other CAR chapters

which include:

Chapter 1 Overview

Chapter 2 Definition of Capital

Chapter 3 Credit RiskStandardized Approach

Chapter 4 Settlement and Counterparty Risk

Chapter 5 Credit Risk Mitigation

Chapter 6 Credit Risk- Internal Ratings Based Approach

Chapter 7 Structured Credit Products

Chapter 8 Operational Risk

Chapter 9 Market Risk


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Table of Contents

Chapter 1 - Overview................................................................................................................ 41.1. Scope of application .............................................................................................. 41.2. Regulatory capital .................................................................................................. 41.3. Total risk weighted assets ...................................................................................... 5

1.3.1. Credit risk approaches ............................................................................ 51.3.2. Operational risk approaches ................................................................... 61.3.3. Market risk............................................................................................... 7

1.4. Approval to use the advanced approaches ............................................................. 71.5. Calculation of minimum capital requirements ...................................................... 81.6. Capital Conservation Buffer ................................................................................ 101.7. Capital targets ...................................................................................................... 111.8. Capital flooradvanced approaches .................................................................. 12

1.8.1. The capital floor .................................................................................... 131.8.2. Adjusted capital requirement ................................................................ 13

1.9. The assets to capital multiple ............................................................................... 13


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Chapter 1 - Overview

1. Outlined below is an overview of capital adequacy requirements for banks and federallyregulated trust or loan companies and for bank holding companies incorporated or formed underPart XV of theBank Act, collectively referred to as institutions.

2. This chapter is drawn from the Basel Committee on Banking Supervision (BCBS) BaselIII framework, entitled: Basel III: A global regulatory framework for more resilient banks andbanking systemsDecember 2010 (rev June 2011). For reference, the Basel III text paragraphnumbers that are associated with the text appearing in this chapter are indicated in squarebrackets at the end of each paragraph1.

3. This guideline contains two methodologies for determining capital and risk weightedassets for purposes of calculating the capital ratios and the assets to capital multiple. The firstmethodology is referred to as transitional and is defined as capital calculated according to thecurrent years phase-in of supervisory adjustments and phase-out of non-qualifying capital

instruments. Refer to chapter 2 for details regarding the various phase-in and phase-outprovisions. The second methodology is referred to as all-in and is defined as capital calculatedto include all of the regulatory adjustments that will be required by 2019 but retaining the phase-out rules for non-qualifying capital instruments.

1.1. Scope of application4. These capital adequacy requirements apply on a consolidated basis. The consolidatedentity includes all subsidiaries (entities that are controlled and joint ventures where generallyaccepted accounting principles permit pro-rata consolidation) except;

insurance subsidiaries

other regulated financial institutions whose leverage is inappropriate for a deposit-takinginstitution and that, because of their size, would have a material impact on the leverageof the consolidated entity.

1.2. Regulatory capital5. Total capital consists of the sum of the following elements:

i. Tier 1 capital, consisting of:a. Common Equity Tier 1 capitalb. Additional Tier 1 capital

ii.Tier 2 capital

1 Following the format: [BCBS June 2011 par x]


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6. The criteria for the capital elements comprising the two tiers, as well as the variouslimits, restrictions and regulatory adjustments to which they are subject, are described inchapter 2.

1.3.

Total risk weighted assets

1.3.1. Credit r isk approaches1.3.1.1. Internal ratings based (IRB) approaches7. Institutions that have total regulatory capital (net of deductions) in excess of CAD $5billion, or that have greater than 10% of total assets or greater than 10% of total liabilities thatare international2, are expected to use an Advanced Internal Ratings Based Approach for allmaterial portfolios and credit businesses in Canada and the United States. Under this approach,described in chapter 6, risk weights are a function of four variables and the type of exposure

(corporate, retail, small to medium sized enterprise, etc. ). The variables are: Probability of default (PD) of the borrower Loss given default (LGD) Maturity Exposure at default (EAD)

8. Under the Foundation Internal Ratings Based Approach (FIRB), institutions determinePDs, while other variables are determined by OSFI. Under the Advanced Internal Ratings BasedApproach (AIRB), institutions determine all variables.

9. Under the IRB approaches, EAD is determined gross of all specific allowances. Theamount used in the calculation of EAD should normally be based on book value, except for thefollowing where EAD should be based on amortized cost:

Certain financial instruments in the banking book

loans fair valued under the fair value option or fair value hedge debt and loans fair valued under available for sale accounting.

1.3.1.2. Standardized approach10. The default approach to calculating risk weighted assets is the standardized approach asdescribed in chapter 3. Under this approach, assessments from qualifying rating agencies areused to determine risk weights for:

Claims on sovereigns and central banks2 This includes assets and liabilities booked outside of Canada as well as assets and liabilities of non-residents

booked in Canada.


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Claims on non-central government public sector entities (PSEs) Claims on multilateral development banks (MDBs) Claims on banks and securities firms Claims on corporates

11. On-balance sheet exposures under the standardized approach should normally bemeasured at book value, except the following where exposures should be measured at amortizedcost:

Certain financial instruments in the banking book

loans fair valued under the fair value option or fair value hedge own-use property, plant and equipment

12. For own-use property that is accounted for using the revaluation model, reportedexposures should be based on an adjusted book value that reverses the impact of:

the balance of any revaluation surplus included in Other Comprehensive Income; and accumulated net after-tax revaluation losses that are reflected in retained earnings at

conversion to IFRS or as a result of subsequent revaluations

13. For own-use property that is accounted for using the cost model, and where the deemedvalue of the property was determined at conversion to IFRS by using fair value, reportedexposures should be based on an adjusted book value that reverses the impact of after taxunrealized fair value gains and losses reflected in retained earnings at conversion to IFRS.

1.3.2. Operati onal r isk approaches14. There are three approaches to operational risk described in chapter 8: the BasicIndicator Approach, the Standardized Approach and the Advanced Measurement Approach.

15. The Basic Indicator Approach requires institutions to calculate operational risk capitalrequirements by applying a factor of 15% to a three-year average of positive annual grossincome.

16. The Standardized Approach divides institutions activities into eight business lines. Thecapital requirement is calculated by applying a factor to a three-year average of annual grossincome for each business line. Individual business line requirements are added to arrive at the

capital requirement for operational risk.

17. Under the Advanced Measurement Approach, the operational risk capital requirement isbased on the institutions internal operational risk measurement system. Institutions using an

IRB approach to credit risk are expected to implement, over time, an Advanced MeasurementApproach to operational risk.


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1.3.3. Market ri sk18. Market risk requirements apply only to institutions where the greater of the value oftrading book assets or the value of trading book liabilities is at least 10% of total assets; andexceeds $1 billion. Market risk requirements may be calculated using the Standardized

Approach or the Internal Models Approach, both of which are described in chapter 9.

19. OSFI retains the right to apply the framework to other institutions, on a case by casebasis, if trading activities are a large proportion of overall operations.

20. The Standardized Approach is a building block approach where the capital charge foreach risk category is determined separately.

21. Alternatively, institutions may use their own internal risk management models tocalculate specific risk and general market risk exposures, providing they meet:

Certain general criteria concerning the adequacy of the risk management system Qualitative standards for internal oversight of the use of models Guidelines for specifying an appropriate set of market factors Quantitative standards setting out the use of common minimum statistical parameters

for measuring risk

Guidelines for stress testing and back testing Validation procedures for external oversight and the use of models

1.4. Approval to use the advanced approaches22. Institutions must receive explicit prior approval from OSFI in order to use any of thefollowing approaches for regulatory capital purposes: the Foundation and Advanced IRBApproaches to credit risk, Advanced Measurement Approaches to operational risk and InternalModels Approach to market risk. The steps involved in the application for approval of theseapproaches are outlined in OSFI Implementation Notes issued pursuant to this Guideline

23. OSFI will consider AIRB approval with conditions for those institutions that have madea substantial effort and are close to being ready for parallel reporting consistent with the rolloutplan but are not completely ready. Institutions that do not receive approval will be required toemploy a form of the Standardized Approach to credit risk and either the Basic Indicator orStandardized Approach to operational risk.

24. An institution achieving approval with conditions will be allowed to use the IRBapproach but may be required to adhere to a higher initial floor. Once it achieves fullcompliance with IRB rollout and data requirements, and OSFI has agreed, the institution mayproceed to the first threshold floor of 90% described in section 1.8. In either case, OSFI will notrule out the possibility of requiring floors on individual asset classes or reviewing approvalconditions based on implementation progress.


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25. Besides meeting the qualitative and quantitative requirements for an IRB rating system,institutions will need, at a minimum, to satisfy the following requirements to obtain approvalwith conditions (with a possibly higher initial floor):

The institution is able to provide parallel reporting for at least two quartersat leastone without material manual intervention.

The institution is meeting the IRB use test. On implementation the institution will have rolled out IRB to approximately 80% of

its consolidated credit exposures, as of the end of the fiscal year prior to the fiscalyear in which the institution first applies to use the IRB approach, measured in termsof notional exposure and Standardized risk-weighted exposures.

26. An institution will remain in the approval with conditions category until it meets boththe qualitative and quantitative requirements for an IRB rating system set out in this Guidelineand the requirements listed below:

The institution adheres to its agreed rollout plan and conditions. Internal audit provides an opinion as to the design and effectiveness of the internal

controls, including those for material manual intervention, that ensure data qualityand integrity.

The institution has a functioning capital management program that makes use ofrobust stress testing. An institution should be able to demonstrate the potential cross-cycle sensitivity of its capital ratios and minimum capital requirements and how theinstitution intends to manage this within its broader capital planning process.

27. Once an institution meets the above requirements, it may proceed to full approvalsubject to the capital floor described in section 1.8.

1.5. Calculation of OSFI minimum capital requirements28. Institutions are expected to meet minimum risk-based capital requirements for exposureto credit risk, operational risk and, where they have significant trading activity, market risk.Total risk-weighted assets are determined by multiplying the capital requirements for market riskand operational risk by 12.5) and adding the resulting figures to risk-weighted assets for creditrisk. The capital ratios are calculated by dividing regulatory capital by total risk-weighted assets.The three important ratios consist of common equity tier 1, total tier 1 and total capital and arecalculated as follows:


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Risk Based Capital Ratios

=

RiskMarket12.5RisklOperationa12.5RWACredit06.1RWACredit

Capital

IRBedStandardiz

Where:

Capital = Common equity tier 1 (CET1), tier 1 capital, or total capital as set out in chapter 2

Credit RWAStandardized = Risk-weighted assets for credit risk determined using the Standardizedapproach in chapters 3 and 7.

Credit RWA IRB = Risk-weighted assets for credit risk determined using the Internal RatingsBased (IRB) approaches in chapters 6 and 7.

Operational Risk = The operational risk capital charge calculated using one of the approaches inchapter 8.

Market Risk = The market risk capital charge using one or a combination of the standardized orinternal models approaches set out in chapter 9.

29. Table 1 provides the minimum common equity tier 1, total tier 1 and total capital ratiosbefore application of the capital conservation buffer. The ratios between 2013 and 2019 includephase-in of certain regulatory adjustments and phase-out of non-qualifying capital instruments asoutlined in chapter 2.

Table 1: Minimum capital requirementseffective Q1 each year

2013 2014 2015 2016 2017 2018 2019 2020 2021

Common equity tier 1

(CET1)3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%

Total Tier 1 capital 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Total capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%

Phase-in and Phase-out elements

Phase-in: RegulatoryAdjustmentssee Chapter2, section 2.3 for details)

20% 40% 60% 80% 100% 100% 100% 100%

Phase-out: Capitalinstruments that no longerqualify as non-core Tier 1or Tier 2 capitalphasedout over 10 year horizonbeginning in 2013.

90% 80% 70% 60% 50% 40% 30% 20% 10%


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1.6. Capital Conservation Buffer30. In addition to the minimum capital ratios, institutions will be required to hold a capitalconservation buffer. The capital conservation buffer is designed to avoid breaches of minimumcapital requirements. Outside of periods of stress, institutions should hold buffers of capital

above the regulatory minimums. Should buffers be drawn down, institutions should implement acapital restoration plan for rebuilding buffers within a reasonable timeframe. The capitalrestoration plan should be discussed with OSFI. There are a range of actions that can be taken torebuild buffers including reducing discretionary distributions of earnings. This could includereducing dividend payments, share-buy-backs and to the extent they are discretionary, staffbonus payments. Institutions may also choose to raise new capital from the private sector as analternative to conserving internally generated capital. [BCBS June 2011 par 122, 123, 124]

31. Greater efforts should be made to rebuild buffers the more they have been depleted. Inthe absence of raising capital in the private sector, the share of earnings retained by institutionsfor the purpose of rebuilding capital buffers should increase the nearer that actual capital levels

are to minimum capital requirements. [BCBS June 2011 par 125]

32. It is not acceptable for institutions which have depleted their capital buffers to use futurepredictions of recovery as justification for maintaining generous distributions to shareholders,other capital providers and employees. These stakeholders, rather than depositors, must bear therisk that recovery will not be forthcoming. [BCBS June 2011 par 126]

33. The capital conservation buffer establishes a safeguard above the minimum capitalrequirements and can only be met with common equity tier 1 capital. The capital conservationbuffer will be phased-in between 2016 and 2019 and when fully transitioned the buffer is 2.5%of risk weighted assets. Institutions should maintain the minimum common equity tier 1 capitalratio, total tier 1 capital ratio and total capital ratio plus the capital conservation buffer. [BCBSJune 2011 par 129, 130]

Table 2: Capital conservation buffereffective Q1 each year

2013 2014 2015 2016 2017 2018 2019

Capital conservation buffer 0.625% 1.25% 1.875% 2.50%

Minimum capital ratios plus capital conservation buffer

Common equity tier 1 (CET1) 3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7.0%

Total Tier 1 capital 4.5% 5.5% 6.0% 6.625% 7.25% 7.875% 8.5%

Total capital 8.0% 8.0% 8.0% 8.625% 9.25% 9.875% 10.5%

34. Commencing January 1, 2016, if an institutions capital ratios fall below the levels setout in table 2, in the absence of other remedial actions to improve its capital ratios, capitalconservation ratios will be imposed that limit distributions. These limits increase as aninstitutions capital levels approach the minimum requirements. [BCBS June 2011 par 129]

35. Table 3 sets out the capital conservation ratio an institution must meet at various levelsof common equity tier 1 capital. Once imposed, conservation ratios will remain in place until


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such time as capital ratios have been restored. If an institution wants to make payments in excessof the constraints set out in table 3, sufficient capital must be raised in the private sector to fullycompensate for the excess distribution. This alternative should be discussed with OSFI as part ofan institutions Internal Capital Adequacy Assessment Process (ICAAP). [BCBS June 2011 par131]

Table 3Minimum capital conservation ratios at various levels of

Common Equity Tier 1 (CET1)

2016 2017 2018 2019 Capital

Conservation Ratio

4.5% - 4.656% 4.5% - 4.813% 4.5% - 4.969% 4.5% - 5.125% 100%

>4.656% - 4.813% >4.813% - 5.125% >4.969%5.438% >5.125% - 5.75% 80%

>4.813% - 4.969% >5.125% - 5.438% >5.438% - 5.906% >5.75% - 6.375% 60%

>4.969% - 5.125% >5.438% - 5.75% >5.906% - 6.375% >6.375% - 7.0% 40%

>5.125% >5.75% >6.375% >7.0% 0%

36. Items considered to be distributions include dividends and share buybacks, discretionarypayments on other tier 1 capital instruments and discretionary bonus payments to staff. Paymentsthat do not result in depletion of common equity tier 1, which may for example include certainscrip. or stock, dividends, are not considered distributions. [BCBS June 2011 par 132a)]

37. Earnings are defined as distributable profits for the previous four quarters calculatedprior to the deduction of elements subject to the restriction on distributions. Earnings arecalculated after the tax which would have been reported had none of the distributable items beenpaid. As such, any tax impact of making such distributions are reversed out. Where aninstitution does not have positive earnings and has a common equity tier 1 ratio of less than 7%,it will be restricted from making positive net distributions. [BCBS June 2011 par 132(b)]

38. The capital conservation buffer will be phased in between the first fiscal quarter of 2016and year-end 2018 becoming fully effective in the first fiscal quarter of 2019. It will begin at0.625% of RWAs for the first fiscal quarter of 2016 and increase each subsequent year by anadditional 0.625 percentage points, to reach its final level of 2.5% of RWAs in the first fiscalquarter of 2019. [BCBS June 2011 par 133]

1.7. Capital targets39. In addition to the OSFI minimum capital requirements stipulated in Chapter 1, section1.5, OSFI expects all institutions to attain target capital ratios equal to or greater than the 2019

minimum capital ratios plus conservation buffer level early in the transition period. For allinstitutions this means an all-in target common equity tier 1 (CET1) ratio of 7% by the firstquarter of 2013. Further, OSFI expects all institutions to attain all-in target capital ratios of8.5% for total tier 1 and 10.5% for total capital by the first quarter of 2014 (see table 4).


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Table 4: All-in Capital targets (including capital conservation buffer)

effective Q1 each year

2013 2014 2015 2016 2017 2018 2019

Common equity tier 1 (CET1) 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Tier 1 capital 8.5% 8.5% 8.5% 8.5% 8.5% 8.5%

Total capital 10.5% 10.5% 10.5% 10.5% 10.5% 10.5%

40. These all-in targets are applicable to all institutions and are triggers for supervisoryintervention consistent with the OSFI Guide to Intervention. If an institution is off-side therelevant target ratios, supervisory action will be taken proportional to the shortfall andcircumstances that caused the shortfall and may include a range of actions, including restrictionson distributions.

41. The Superintendent may set higher target capital ratios for individual institutions orgroups of institutions where circumstances warrant. This could include additional capitalrequired when aggregate credit growth is judged to be associated with a build-up of materialsystem-wide risk in Canada or in other jurisdictions where an institution has credit exposures.

42. More specifically, OSFI, in consultation with its FISC partners, will monitor aggregatecredit growth and other indicators that may signal a build-up of system-wide risk that couldresult in future potential losses sufficient to impair capital adequacy and assess the need foradditional buffers. National authorities in other jurisdictions may also put in place buffersaddressing cycles indicated by excess aggregate credit growth.

43. The need for a higher target capital ratio would consider how robust existing capitalratios are in light of an institutions collective allowances, stress testing program and ICAAPresults3. Such higher target capital ratios are a prudential measure only and are therefore meant to

ensure institutions have a buffer of capital for protection against future potential losses.

1.8. Capital flooradvanced approaches44. For institutions using advanced approaches for credit risk or operational risk, there is acapital floor. The calculation of the floor is set out below for institutions that have implementedthe IRB approach for credit risk or the Advanced Measurement Approach (AMA) for operationalrisk as of year-end 2012. Institutions that plan to implement one of the advanced approaches forcredit risk or operational risk after year-end 2012 should discuss an appropriate floor calculationwith OSFI.

Institutions that have implemented one of the advanced approaches for credit or operational riskas of year-end 2012 must calculate the difference between

(i) the floor as defined in section 1.8.1, and

3 ForOSFIs expectations refertoGuideline E-18: Stress TestingandGuideline E-19: Internal Capital AdequacyAssessment Process (ICAAP).
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(ii)an adjusted capital requirement as defined in section 1.8.2.45. If the floor amount is larger than the adjusted capital requirement (i.e. the difference ispositive), institutions are required to add 12.5 times the difference to the total risk-weightedassets otherwise calculated under this guideline. This adjusted risk-weighted asset figure must

be used as the denominator in the calculation of the risk-based capital ratios.

1.8.1. The capital fl oor46. The capital floor is determined under Guideline A-3Calculation of TransitionalCapital Floors (November 2007), which is a modified version of the Capital AdequacyRequirements Guideline that was in effect prior to Basel II. The floor is derived by applying anadjustment factor to the net total of the following amounts:

i. 8% of total risk-weighted assets, plusii. all Tier 1 and Tier 2 deductions, lessiii. the amount of any general allowance that may be recognized in Tier 2.

47. The adjustment factor is normally set at 90%. However, depending in the results ofOSFI reviews of individual institutions, OSFI may set a higher or lower adjustment factor.

1.8.2. Adjusted capital r equirement48. The adjusted capital requirement, calculated during the years in which a floor applies, isbased on application of this guideline and is equal to the net total of the following amounts:

i. 8% of total risk-weighted assets, plusii. all Tier 1 and 2 deductions, lessiii. excess provisions included in Tier 2, lessiv. the amount of general allowances that may be recognized in Tier 2 in respect of

exposures for which the standardized approach is used.

1.9. The assets to capital multiple49. The BCBS is currently finalizing a leverage ratio requirement with implementationplanned in the first fiscal quarter of 2018. Pending review of the final leverage requirements,institutions are expected to continue to meet an assets to capital multiple test and to operate at orbelow their authorized multiple on a continuous basis. To facilitate adjustment to the leveragerequirement and minimize the number of capital definitions, total capital for purposes of theassets to capital multiple is calculated on a transitional basis as described in Chapter 2 of thisguideline. The assets to capital multiple is calculated by dividing the institutions total assets,including specified off-balance sheet items, by total capital. All items that are deducted fromcapital are excluded from total assets.

50. Where balance sheet exposures are not deemed to be materially reduced by atransaction, continued inclusion in total assets for purposes of the assets to capital multiple may


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be appropriate regardless of the accounting treatment. (see March 2010 Advisory entitledConversion to International Financial Reporting Standards (IFRS) b Federally Regulated

Entities (FREs), section II.

51. Off-balance sheet items for this test are direct credit substitutes4, including letters ofcredit and guarantees, transaction-related contingencies, trade-related contingencies and sale andrepurchase agreements, as described in chapter 3. These are included at their notional principalamount. In the case of derivative contracts, where institutions have legally binding nettingagreements (meeting the criteria established in chapter 3, Netting of Forwards, Swaps, PurchasedOptions and Other Similar Derivatives) the resulting on-balance sheet amounts can be netted forthe purpose of calculating the assets to capital multiple.

52. Institutions may exclude from total assets: mortgages securitized through CMHC Programs5 up to and including March 31, 2010 all existing and future reinvestments related to Canada Mortgage Bond/Insured

Mortgage Purchase Program transactions completed up to and including March 31,2010

53. Under this test, total assets should be no greater than 20 times capital, although thismultiple can be exceeded with the Superintendent's prior approval to an amount no greater than23 times. Alternatively, the Superintendent may prescribe a lower multiple. In setting the assetsto capital multiple for individual institutions, the Superintendent will consider such factors asoperating and management experience, strength of parent, earnings, diversification of assets,type of assets and appetite for risk.

54. OSFI will consider applications for authorized multiples in excess of 20 times frominstitutions that demonstrate that, in substance, they:

meet or exceed their risk-based capital targets (e.g. all-in common equity tier 1 of7%, total tier 1 of 8.5% and total capital of 10.5% or institution specific targets ifhigher)

have total capital6 of a significant size (e.g., $100 million) and have well-managedoperations that focus primarily on a very low risk market segment

have a four-quarter average ratio of adjusted risk-weighted assets to adjusted net on-and off-balance sheet assets7 that is less than 60%

4 When an institution, acting as an agent in a securities lending transaction, provides a guarantee to its client, theguarantee does not have to be included as a direct credit substitute for the assets to capital multiple if the agentcomplies with the collateral requirements of Guideline B-4, Securities Lending.

5 CMHC Programs comprise the following programs of the Canada Mortgage and Housing Corporation: NationalHousing ACT Mortgage-Backed Securities (NHA MBS); Canada Mortgage Bond Program and the InsuredMortgage Purchase Program.

6 Total capital as reported on Schedule 1 of BCAR.7 The adjusted ratio of risk-weighted assets to net on- and off-balance sheet assets is usedas a proxy for asset

quality and is calculated by dividing:


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have adequate capital management processes and procedures8 have been at stage 09 for at least four consecutive quarters have no undue risk concentrations

55.

Requests for authorized multiple increases for particular institutions should beaddressed to the Legislation and Approvals Division in Ottawa and should also include abusiness case that, at a minimum, sets out:

the institutions own assessment of its risk profile and general financial condition,and an explanation of why these factors justify a higher assets to capital multiple

growth projections by business line what percentage of total assets these business lines are expected to account for the expected impact of the projected growth on profitability and risk-based capital

ratios

56. Increased authorized multiples will not exceed 23 times capital.57. If an institution exceeds its increased authorized multiple or allows its risk-based capitalratios to drop below its risk-based capital targets, OSFI will reduce the institutions authorizedmultiple and will require the institution to file with OSFI an action plan for achieving thereduced authorized multiple. The institution will be required to operate at or below the originallevel for four consecutive quarters before being reconsidered for an increase to its multiple.

58. For two years after an institution receives an increase to its authorized multiple, it willbe expected to be able to provide, at the request of the OSFI relationship manager, information

demonstrating that: It continues to meet the six pre-conditions required for the initial application (see

paragraph 54).

Its risk profile, including the balance sheet structure, remains essentially the same asthat shown in the business case used to justify the increase.

Total risk-weighted assets by Net on- and off-balance sheet assets per Schedule 1 + Exposure at default of OTCderivatives contracts per Schedule 40 (this includes contracts subject to and contracts not subject to permissible

netting).

The ratio should be calculated using data from the four previous consecutive quarters.8 Institutions with adequate capital management processes and procedures can demonstrate that they have

management reports that allow tracking of compliance with the assets to capital multiple and risk-based capitalratio targets between quarter ends.

9 Refer to the Guide to Intervention for Federal Financial Institutions for further details. Stage 0 means: Noproblems/Normal activities -- Routine supervisory and regulatory activities pursuant to mandates of OSFI andCDIC. In addition, both agencies conduct research and analyze industry-wide issues and trends, appropriate totheir respective functions

Documents

Chapter 1 - Overview.pdf