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OSFI's New Capital Rules

OSFI's New Capital Rules

by Yvonne von Jena | January 11, 2018

OSFI has announced that it will be introducing higher capital requirements for Canadian FIs under Basel 3.  The new capital rules:

  • Would increase capital requirements, replacing the current 50% capital output floor used by Canada's banks under the Basel 2 floor, calibrated at 75%
  • Are stricter than those proposed by global regulators; that is, the floor agreed to by global regulators in December is 72.5%
  • Were designed as an interim step before new global rules are phased in in 2022
  • Allows the large banks to still use their own models to calculate how much risk is on their books, but their models can only vary from a standard model by no more than 27.5%; thus this is expected to reduce the banks’ reliance on their own models and impact the banks using them, as per Reuters

Additional Insights Provided by OSFI

Here are some key excerpts from recent remarks made by Carolyn Rogers, Assistant Superintendent of the Regulation Sector at OSFI, that speak to the initiative and OSFI’s rationale on its approach:

We have learned to not hesitate to make adjustments to international standards where we feel they are necessary to meet Canada's objectives.

The current output floor was implemented by OSFI in 2008. It’s a backstop…, was designed to be a temporary bridge from Basel 1 and Basel 2….. [and] is showing its age…. Leaving it in place for another five years has operational risk and it also risks distorting the incentives we view as critical to a credible capital regime.

The final chapter of Basel 3 will bring with it a new output floor, based on a more risk-sensitive standardized approach, but the transition to this floor is only proposed to begin in 2022.

Therefore, as an interim step, OSFI will be replacing the current floor with the more risk sensitive Basel 2 floor, calibrated at 75%.

Specific details of the changes will be published on OSFI’s website shortly and transition will begin next quarter, and finish in Q4 of this year.

With a new output floor in place that we expect to bridge us to the Basel 3 floor, our focus will be on mapping the rest of the transition plan to bring the final set of Basel 3 reforms into Canada. You can expect that we will approach this exercise much the way we have in the past.

You can expect a shorter transition here in Canada [for Basel 3]…. A 10-year timeline for implementation is unnecessarily long. Canadian banks are well positioned to meet the final Basel 3 requirements. Delaying the start of the implementation by five years and then stretching it out over another five years does not send a clear message of safety and soundness.

The consultation… [is] forthcoming [on the final round of Basel 3 reforms].