Capital Adequacy Requirements (CAR) Chapter 1 - osfi-bsif ...

This alternative should be discussed with OSFI as part of an institution's Internal Capital Adequacy Assessment Process (ICAAP). Skiptomaincontent Skiptosecondarymenu CapitalAdequacyRequirements(CAR)Chapter1–OverviewofRisk-basedCapitalRequirements PageContentAccompanyingDocumentsNewsReleaseLetterGuidelineImpactAnalysisStatementChaptersIndexChapter1Chapter2Chapter3Chapter4Chapter5Chapter6Chapter7Chapter8Chapter8(Effectiveinfiscal2024)Chapter9(Effectiveinfiscal2024)RelatedDocumentsLeverageRequirementsGuidelineLiquidityAdequacyRequirementsGuidelineSMSBsCapitalandLiquidityRequirementsPillar3DisclosureGuidelinesBaselCapitalAdequacyReporting(BCAR)DocumentPropertiesTypeofPublication:GuidelineEffectiveDate:February2023/April2023Footnote1Audiences:Banks/BHC/T&LSubsections485(1)and949(1)oftheBankAct(BA),subsection473(1)oftheTrustandLoanCompaniesAct(TLCA)requirebanks(includingfederalcreditunions),bankholdingcompanies,federallyregulatedtrustcompanies,andfederallyregulatedloancompaniestomaintainadequatecapital.TheCARGuidelineisnotmadepursuanttosubsections485(2)or949(2)oftheBA,ortosubsection473(2)oftheTLCA.However,thecapitalstandardssetoutinthisguidelinetogetherwiththeleveragerequirementssetoutintheLeverageRequirementsGuidelineprovidetheframeworkwithinwhichtheSuperintendentassesseswhetherabank,abankholdingcompany,atrustcompany,oraloancompanymaintainsadequatecapitalpursuanttotheActs.Forthispurpose,theSuperintendenthasestablishedtwominimumstandards:theleverageratiodescribedintheLeverageRequirementsGuideline,andtherisk-basedcapitalratiodescribedinthisguidelineFootnote2.Thefirsttestprovidesanoverallmeasureoftheadequacyofaninstitution'scapital.Thesecondmeasurefocusesonriskfacedbytheinstitution.Notwithstandingthatabank,bankholdingcompany,trustcompany,orloancompanymaymeetthesestandards,theSuperintendentmaydirectabankorbankholdingcompanytoincreaseitscapitalundersubsections485(3)or949(3)oftheBA,oratrustcompanyoraloancompanytoincreaseitscapitalundersubsection473(3)oftheTLCA.OSFI,asamemberoftheBaselCommitteeonBankingSupervision,participatedinthedevelopmentoftheBaselcapitalframeworkonwhichthisguidelineisbased.Whererelevant,theBaselframeworkparagraphnumbersareprovidedinsquarebracketsattheendofeachparagraphreferencingmaterialfromtheBaselframework.Chapter1-Overviewofrisk-basedcapitalrequirementsTheCapitalAdequacyRequirements(CAR)forbanks(includingfederalcreditunions),bankholdingcompanies,federallyregulatedtrustcompanies,andfederallyregulatedloancompaniesaresetoutinninechapters,eachofwhichhasbeenissuedasaseparatedocument.ThisdocumentshouldbereadinconjunctionwiththeotherCARchapters:Chapter1-OverviewofRisk-basedCapitalRequirementsChapter2-DefinitionofCapitalChapter3-OperationalRiskChapter4-CreditRisk–StandardizedApproachChapter5-CreditRisk-InternalRatingsBasedApproachChapter6-SecuritizationChapter7-SettlementandCounterpartyRiskChapter8-CreditValuationAdjustment(CVA)RiskChapter9-MarketRiskTableofContentsChapter1-OverviewofRisk-basedCapitalRequirements 1.1.ScopeofApplication1.2.RegulatoryCapital1.3.TotalRiskweightedAssets 1.3.1.CreditRisk1.3.2.MarketRisk1.3.3.OperationalRisk1.4.ApprovaltouseInternalModelBasedApproaches 1.4.1.ApprovaltousetheIRBApproachestoCreditRisk1.5.CapitalFloor–InternalModelBasedApproaches 1.5.1.TheCapitalFloor1.5.2.AdjustedCapitalRequirement1.6.CalculationofOSFIMinimumCapitalRequirements 1.6.1.Risk-BasedCapitalRatiosforD-SIBsandCategoryIandIISMSBs1.6.2.SimplifiedRisk-BasedCapitalRatioforCategoryIIISMSBs1.7.MandatedCapitalBuffers 1.7.1.CapitalConservationBuffer1.7.2.CountercyclicalBuffer1.8.DomesticSystemicallyImportantBank(D-SIB)Surcharge1.9.DomesticStabilityBuffer1.10.CapitalTargetsAnnex1–DomesticSystemicImportanceandCapitalTargetsAnnex2–SupervisoryTargetCapitalRequirementsChapter1-OverviewofRisk-basedCapitalRequirements Outlinedbelowisanoverviewofthecapitaladequacyrequirementsforbanks(includingfederalcreditunions),bankholdingcompanies,federallyregulatedtrustcompanies,andfederallyregulatedloancompanies,collectivelyreferredtoas'institutions'.ThischapterisdrawnfromtheBaselCommitteeonBankingSupervision(BCBS)BaselFrameworkpublishedontheBISwebsiteFootnote3effectiveDecember15,2019.Forreference,theBaselparagraphnumbersthatareassociatedwiththetextappearinginthischapterareindicatedinsquarebracketsattheendofeachparagraphFootnote4.1.1.ScopeofApplicationThecapitaladequacyrequirementsoutlinedinthisguidelineapplyonaconsolidatedbasistothefollowinginstitutions:allinstitutionsdesignatedbyOSFIasdomesticsystemicallyimportantbanks(D-SIBs);andsmallandmedium-sizeddeposit-takinginstitutions(SMSBsFootnote5.)whichfallintoCategoriesI,IIorIIIasdefinedinOSFI'sSMSBCapitalandLiquidityRequirementsGuidelineFootnote6.Theconsolidatedentityincludesallsubsidiariesexceptinsurancesubsidiaries.OSFIexpectsinstitutionstoholdcapitalwithintheconsolidatedgroupinamannerthatisconsistentwiththelevelandlocationofrisk.1.2.RegulatoryCapitalTotalcapitalconsistsofthesumofthefollowingelements:Tier1capital,consistingof: CommonEquityTier1(CET1)capital;andAdditionalTier1capitalTier2capitalThecriteriaforthecapitalelementscomprisingthetwotiers,aswellasthevariouslimits,restrictionsandregulatoryadjustmentstowhichtheyaresubject,aredescribedinChapter2.1.3.TotalRisk-weightedAssetsRisk-weightedassets(RWA)makeupthedenominatoroftherisk-basedcapitalratios,andiscalculatedasthehigherof:thesumofthefollowingthreeelements: RWAforcreditrisk;RWAformarketrisk;andRWAforoperationalrisk;andtheadjustedRWAdeterminedasperthecapitalfloordescribedinsection1.5.[BaselFramework,RBC20.4]1.3.1.CreditRiskRWAforcreditrisk(includingcounterpartycreditrisk)iscalculatedasthesumof:CreditRWAforbankingbookexposureswhich,excepttheRWAlistedin(b)through(e)below,iscalculatedusing: thestandardizedapproach(assetoutinChapter4);ortheInternalRatingsBased(IRB)approach(assetoutinChapter5).RWAforcounterpartycreditriskfrombankingbookexposuresandtradingbookexposures(assetoutinChapter7),excepttheexposureslistedin(c)and(f)below.CreditRWAforequityinvestmentsinfundsthatareheldinthebankingbookcalculatedusingoneormoreoftheapproachessetoutinChapter4: Thelook-throughapproachThemandate-basedapproachThefall-backapproachRWAforsecuritizationexposuresheldinthebankingbook,calculatingusingoneormoreoftheapproachessetoutinChapter6: SecuritizationStandardizedApproach(SEC-SA)SecuritizationExternal-RatingsBasedApproach(SEC-ERBA)SecuritizationInternalRatingsBasedApproach(SEC-IRBA)SecuritizationInternalAssessmentApproach(SEC-IAA)Ariskweightof1250%incaseswheretheinstitutioncannotuse(i)to(iv)above.RWAforexposurestocentralcounterpartiesinthebankingbookandtradingbook,calculatedusingtheapproachsetoutinChapter7.RWAfortheriskposedbyunsettledtransactionsandfailedtrades,wherethetransactionsareinthebankingbookortradingbookandarewithinthescopeoftherulessetoutinChapter7.RWAforcreditvaluationadjustment(CVA)riskforexposuresinthetradingandbankingbook,calculatedassetoutinChapter8usingeither: ThestandardizedapproachforCVA;orTheadvancedapproachforCVA.[BaselFramework,RBC20.6]Institutionsthathavetotalregulatorycapital(netofdeductions)inexcessofCAD$5billion,orthathavegreaterthan10%oftotalassetsorgreaterthan10%oftotalliabilitiesthatareinternationalFootnote7,areexpectedtouseIRBapproachesforallmaterialportfoliosandcreditbusinessesinCanadaandtheUnitedStates.UndertheIRBapproaches,exposureatdefault(EAD)isdeterminedgrossofallspecificallowances.TheamountusedinthecalculationofEADshouldnormallybebasedonbookvalue,exceptforthefollowingwhereEADshouldbebasedonamortizedcost:loansfairvaluedunderthefairvalueoptionorfairvaluehedge;anddebtandloansfairvaluedthroughOtherComprehensiveIncome.Underthestandardizedapproach,on-balancesheetexposuresshouldnormallybemeasuredatbookvalue,exceptthefollowingwhereexposuresshouldbemeasuredatamortizedcost:loansfairvaluedunderthefairvalueoptionorfairvaluehedge;debtandloansfairvaluedthroughOtherComprehensiveIncome;andown-useproperty,plantandequipmentForown-usepropertythatisaccountedforusingtherevaluationmodel,reportedexposuresshouldbebasedonanadjustedbookvaluethatreversestheimpactof:thebalanceofanyrevaluationsurplusincludedinOtherComprehensiveIncome;andaccumulatednetafter-taxrevaluationlossesthatarereflectedinretainedearningsorasaresultofsubsequentrevaluationsTheapproacheslistedinparagraph8specifyhowinstitutionsshouldmeasurethesizeoftheirexposures(i.e.,EAD)anddeterminetheirRWA.Certaintypesoftransactionsinthebankingbookandtradingbook(suchasderivativesandsecuritiesfinancialtransactions)giverisetocounterpartycreditrisk,forwhichthemeasurementofthesizeoftheexposurecanbecomplex.Therefore,theapproacheslistedinparagraph8include,orcrossreferto,thefollowingmethodsavailabletodeterminethesizeofthecounterpartyexposures(refertosection7.1ofChapter7foranoverviewofthecounterpartycreditriskrequirementsincludingthetypesoftransactionstowhichthemethodsbelowcanbeapplied):Thestandardizedapproachformeasuringcounterpartycreditriskexposures(SA-CCR),setoutinsection7.1.7.Thecomprehensiveapproach,setoutinsection4.3.3(iii)ofChapter4.Thevalueatrisk(VaR)modelsapproach,setoutinsection5.4.1(iii)ofChapter5.TheInternalModelMethod(IMM),setoutinsection7.1.5.[BaselFramework,RBC20.7]ForbankswithOSFIapprovaltouseIMMtocalculatecounterpartycreditriskexposures,EADforcounterpartycreditriskexposuresmustbecalculatedaccordingtosections7.1.3through7.1.5.[BaselFramework,RBC20.8]1.3.2.MarketRiskMarketriskrequirements,asoutlinedinChapter9,applytointernationallyactiveinstitutionsandallinstitutionsdesignatedbyOSFIasD-SIBs.OSFIretainstherighttoapplytheframeworktootherinstitutions,onacasebycasebasis,iftradingactivitiesarealargeproportionofoveralloperations.InstitutionssubjecttomarketriskrequirementsmustidentifytheinstrumentsthatareinthetradingbookfollowingtherequirementsofChapter9.Allinstrumentsthatarenotinthetradingbookandallotherassetsoftheinstitution(termed"bankingbookexposures")mustbetreatedunderoneofthecreditriskapproaches.[BaselFramework,RBC20.5]RWAformarketriskarecalculatedasRWAformarketriskforinstrumentsinthetradingbookandforforeignexchangeriskandcommoditiesriskforexposuresinthebankingbook,calculatedusing:Thestandardizedapproach,asdescribedinsection9.5;orTheinternalmodelsapproachsetoutinsection9.6.[BaselFramework,RBC20.9]1.3.3.OperationalRiskAllinstitutionsaresubjecttooperationalriskrequirements,asdescribedinChapter3.RWAforoperationalriskarecalculatedusingeither:TheSimplifiedStandardizedApproach,setoutinsection3.3;orTheStandardizedApproach,setoutinsection3.4.D-SIBsandSMSBsthatreportadjustedgrossincomeFootnote8greaterthan$1.5billionmustusethestandardizedapproach.SMSBswithannualadjustedgrossincomelessthan$1.5billionmustusethesimplifiedstandardizedapproach,unlesstheyhavereceivedapprovalfromOSFItousethestandardizedapproach,assetoutinsection3.2.1.4.ApprovaltouseInternalModelBasedApproachesInstitutionsmustreceiveexplicitpriorapprovalfromOSFIinordertouseanyofthefollowingmodel-basedapproachesforregulatorycapitalpurposes:theFoundationandAdvancedIRBApproachestocreditrisk,theIMMtocounterpartycreditrisk,andtheInternalModelsApproach(IMA)tomarketrisk.ThestepsinvolvedintheapplicationforapprovaloftheseapproachesareoutlinedinOSFIImplementationNotes.OSFIwillconsiderapprovalwithconditionsforthoseinstitutionsthathavemadeasubstantialeffortandarefoundtosatisfymostrequirementsoftheinternalmodelregime.Theinstitutionmustalsobeabletoprovideoutofsampleback-testingandparallelreportingconsistentwithOSFI'scapitalmodelsimplementationnoteFootnote9.InstitutionsthatdonotreceiveapprovalwillberequiredtoemployaformoftheStandardizedApproach.Aninstitutionachievingapprovalwithconditionsforoneofthemodelbasedapproacheswillnormallybeallowedtousetheapproach(insomecasesonlyafterOSFIconfirmsclosureofcertaindeficiencies)butmayberequiredtoadheretoahigherinitialcapitalfloor.Onceitachievesfullcompliancewithallrolloutanddatarequirements,andOSFIhasagreed,theinstitutionmayproceedtothecapitalfloorof72.5%describedinsection1.5.Ineithercase,OSFIwillnotruleoutthepossibilityofrequiringfloorsonindividualassetclassesorreviewingapprovalconditionsbasedonimplementationprogress.Onceapproved,institutionsareexpectedtomeetthequalitativeandquantitativerequirementsfortheinternalmodelapproachassetoutintheguidelineandthesupportingimplementationnotesonanongoingbasis.1.4.1.ApprovaltousetheIRBApproachestoCreditRiskForIRBcreditriskapproval,besidesmeetingthequalitativeandquantitativerequirementsforanIRBratingsystem,institutionswillneed,ataminimum,tosatisfythefollowingrequirementstoobtainapprovalwithconditions(withapossiblyhigherinitialfloor):TheinstitutionismeetingtheIRBusetestprinciplesFootnote10.Theusetestprohibitsinstitutionsfromusingdefaultandlossestimatesfromtheirowninternalratingsthataredevelopedforthesolepurposeofcalculatingregulatorycapital,thesesystemsmustbeusedinotheroperationsoftheinstitution.Onimplementation,theinstitutionwillhaverolledouttheAdvancedIRB(AIRB)orFoundationIRB(FIRB)approachtoapproximately80%ofitsconsolidatedcreditexposures,asoftheendofthefiscalyearpriortothefiscalyearinwhichtheinstitutionreceivesapprovaltousetheIRBapproach,measuredintermsofgrossexposureandtotalcreditRWA.OnceaninstitutionhasreceivedanapprovaltousetheIRBApproach,OSFIwillmonitor,onaquarterlybasis,theinstitution'scompliancewiththe80%IRBthresholdforitsconsolidatedcreditexposuresforwhichanIRBapproachispermitted.Inthepost-approvalperiod,compliancewillbemeasuredintermsofgrossexposureandtotalcreditrisk-weightedassetsasattheapplicablequarter.1.5.CapitalFloor–InternalModelBasedApproachesToreduceexcessivevariabilityofRWAandtoenhancethecomparabilityofrisk-basedcapitalratios,institutionsusinginternalmodelbasedapproachesforcreditrisk,counterpartycreditrisk,ormarketriskaresubjecttoafloorrequirementthatisappliedtoRWA.Thecapitalfloorensuresthatinstitutions'capitalrequirementsdonotfallbelowacertainpercentageofcapitalrequirementsderivedunderstandardizedapproaches.ThecalculationofthefloorissetoutbelowforinstitutionsthathaveimplementedtheIRBapproachforcreditrisk,IMMforcounterpartycreditrisk,orIMAformarketrisk.Institutionsthathaveonlyimplementedthestandardizedapproachesforcreditrisk,counterpartycreditrisk,andmarketriskarenotsubjecttothecapitalfloor.Institutionsthathaveimplementedoneoftheinternalmodelbasedapproachesforcreditrisk,counterpartycreditrisk,ormarketriskmustcalculatethedifferencebetween:thecapitalfloorasdefinedinsection1.5.1,andanadjustedcapitalrequirementasdefinedinsection1.5.2.[BaselFramework,RBC20.11]Ifthecapitalflooramountislargerthantheadjustedcapitalrequirement(i.e.thedifferenceispositive),institutionsarerequiredtoaddthedifferencetothetotalRWAsotherwisecalculatedunderthisguideline.ThisadjustedRWAfiguremustbeusedasthedenominatorinthecalculationoftherisk-basedcapitalratios.1.5.1.TheCapitalFloorThebaseofthecapitalfloorincludesthestandardizedapproachestocreditriskandoperationalriskasdescribedinparagraphs31through35.Thespecificapproachformarketriskisdescribedinparagraph33.Thecapitalfloorisderivedbyapplyinganadjustmentfactortothenettotalofthefollowingamounts:totalrisk-weightedassetsforthecapitalfloor,less12.5timestheamountofanygeneralallowancethatmayberecognizedinTier2capitalfollowingthestandardizedapproachmethodologyasoutlinedinChapter2ofthisguideline.Theadjustmentfactorisnormallysetat72.5%.However,OSFImaysetahigherorloweradjustmentfactorforindividualinstitutions.Thisfactorwillbephased-inoverthreeyears,startingata65%factorin2023andrising2.5%peryearto72.5%in2026. Table1:CapitalFloorTransition Fiscalyear2023202420252026+Flooradjustmentfactor65%67.5%70%72.5%CreditriskRWAsarecalculatedusingthestandardizedapproachasoutlinedinChapter4ofthisguidelineforallassetclassesexceptsecuritization.Thetreatmentofsecuritizationexposuresunderthecapitalfloorisoutlinedinsection6.11ofChapter6.CreditRiskRWAsalsoincludechargesforcentralcounterparty(CCP)exposuresandnon-Delivery-versus-Payment(DvP)tradesoutlinedinChapter7,andcreditvaluationadjustment(CVA)outlinedinChapter8ofthisguideline.FortheexposurevaluesusedinthecalculationofcreditriskRWAs,thetreatmentofcreditriskmitigationshouldfollowthestandardizedapproachoutlinedinsection4.3ofChapter4ofthisguideline,whilecounterpartycreditriskexposuresmustbedeterminedusingthestandardizedapproachtocounterpartycreditriskoutlinedinsection7.1.7ofChapter7ofthisguideline.Additionally,inordertoreducetheoperationalcomplexityofimplementingthecapitalfloor,institutionsmaychoosetoapplytheIRBdefinitionofdefaultforIRBportfoliosratherthanapplyingthestandardizedapproachdefaultdefinition.PriortoNovember2023/January2024Footnote11,marketriskRWAsarecalculatedusingthevalueatrisk(VaR)andstandardizedapproachesasoutlinedinChapter9ofthe2019CARguideline,excludingthecomprehensiveriskmeasure(CRM,section9.11.5.2),theincrementalriskcharge(IRC,Appendix9-9),andstressedVaR(SVaR,paragraph194i)capitalcharges.AfterNovember2023/January2024,marketriskRWAsarecalculatedusingthestandardizedapproachasoutlinedinChapter9ofthisguideline.OperationalriskRWAsarecalculatedusingeithertheStandardizedApproachortheSimplifiedStandardizedApproach,outlinedinChapter3ofthisguideline.Thefollowingapproachesarenotpermittedtobeused,directlyorindirectly,inthecalculationofthecapitalfloor:IRBapproachtocreditrisk;SEC-IRBA;theIMAformarketrisk;theVaRmodelsapproachtocounterpartycreditrisk;andtheIMMforcounterpartycreditriskFootnote12.[BaselFramework,RBC20.12]1.5.2.AdjustedCapitalRequirementTheadjustedcapitalrequirement,isbasedonapplicationofallofthechaptersofthisguidelineandisequaltothenettotalofthefollowingamounts:totalrisk-weightedassets,plus12.5timestheprovisioningshortfalldeduction,less12.5timesexcessprovisionsincludedinTier2,less12.5timestheamountofgeneralallowancesthatmayberecognizedinTier2inrespectofexposuresforwhichthestandardizedapproachisused.Theprovisioningshortfalldeduction,excessprovisionsincludedinTier2,andgeneralallowancesinTier2inrespectofstandardizedportfoliosaredefinedinsection2.1.3.7ofChapter2ofthisguideline.1.6.CalculationofOSFIMinimumCapitalRequirements1.6.1.Risk-BasedCapitalRatiosforD-SIBsandCategoryIandIISMSBsInstitutionsareexpectedtomeetminimumrisk-basedcapitalrequirementsforexposurestocreditrisk,operationalriskand,wheretheyhavesignificanttradingactivity,marketrisk.Totalrisk-weightedassetsaredeterminedbymultiplyingthecapitalrequirementsformarketriskandoperationalriskby12.5andaddingtheresultingfigurestorisk-weightedassetsforcreditrisk.Thecapitalratiosarecalculatedbydividingregulatorycapitalbytotalrisk-weightedassets.ThethreeratiosmeasureCET1,Tier1andTotalcapitaladequacyandarecalculatedasfollows: RiskBasedCapitalRatios = Capital RWA Where: Capital=CET1,Tier1,orTotalcapitalassetoutinChapter2. RWA=Risk-weightedassets,calculatedasdescribedinparagraph7.Table2providestheminimumCET1,Tier1andTotalcapitalratiosforinstitutionsbeforeapplicationofthecapitalconservationbuffer. Table2:Minimumcapitalrequirements(inRWA) CET14.5%Tier16.0%Total8.0%1.6.2.SimplifiedRisk-BasedCapitalRatioforCategoryIIISMSBsCategoryIIISMSBsaresubjecttoaSimplifiedRisk-BasedCapitalRatio(SRBCR),calculatedasfollows: SRBCR = Capital AdjustedTotalAssets + RWA OperationalRisk Where:Capital=CET1,Tier1,orTotalcapitalassetoutinChapter2.AdjustedTotalAssets=TotalAssetsfromtheBalanceSheet,lesstheaggregateofalladjustmentstoregulatorycapitalassetoutinChapter2.RWAOperationalRisk=Risk-WeightedAssetsforoperationalrisk,calculatedasdetailedinChapter3.Table3providestheminimumCET1,Tier1andTotalcapitalratiosforCategoryIIISMSBsbeforeapplicationofthecapitalconservationbuffer. Table3:MinimumCapitalRequirements(measuredasSRBCR) CET14.5%Tier16.0%Total8.0%1.7.MandatedCapitalBuffersInadditiontotheminimumcapitalratios,institutionsarerequiredtoholdacapitalconservationbufferand,whereapplicable,acountercyclicalbuffer.Outsideofperiodsofstress,institutionsshouldholdbuffersofcapitalabovetheregulatoryminimum.Theintentofthesebuffersistoincreaseinstitutions'resiliencegoingintoadownturnandprovideamechanismforrebuildingcapitalduringtheearlystagesofeconomicrecovery.Retainingagreaterproportionofearningsduringadownturnwillhelptoensurethatcapitalbecomesavailabletosupporttheongoingbusinessoperationsofinstitutionsthroughperiodsofstress.[BaselFramework,RBC30.20]Whenbuffershavebeendrawndown,thereisarangeofactionsthatcanbetakentorebuildbuffersincludingreducingdiscretionarydistributionsofearnings.Thiscouldincludereducingdividendsorotherdiscretionarypaymentsonsharesorothercapitalinstruments,share-buy-backsand,totheextenttheyarediscretionary,staffbonuspaymentsFootnote13.Institutionsmayalsochoosetoraisenewcapitalfromtheprivatesectorasanalternativetoconservinginternallygeneratedcapital.Shouldbuffersbedrawndown,institutionsshouldimplementacapitalrestorationplanforrebuildingbufferswithinareasonabletimeframeor,wherethebreachisexpectedtobecorrectedpromptly,aplanthatprovidesassurancethatthecapitalconservationbufferwillberestoredonasustainedbasis.ThecapitalrestorationplanshouldbediscussedwithOSFIaspartofthecapitalplanningprocess.[BaselFramework,RBC30.21]Greatereffortsshouldbemadetorebuildbuffersthemoretheyhavebeendepleted.Intheabsenceofraisingcapitalintheprivatesector,theshareofearningsretainedbyinstitutionsforthepurposeofrebuildingcapitalbuffersshouldincreasethenearertheiractualcapitallevelsaretotheminimumcapitalrequirements.[BaselFramework,RBC30.22]Itisnotacceptableforinstitutionswhichhavedepletedtheircapitalbufferstousefuturepredictionsofrecoveryasjustificationformaintaininggenerousdistributionstoshareholders,othercapitalprovidersandemployees.Thesestakeholders,ratherthandepositors,mustbeartheriskthatrecoverywillnotbeforthcoming.Itisalsonotacceptableforinstitutionsthathavedepletedtheircapitalbufferstousethedistributionofcapitalasawaytosignaltheirfinancialstrength.[BaselFramework,RBC30.23]1.7.1.CapitalConservationBufferThecapitalconservationbufferestablishesasafeguardabovetheminimumcapitalrequirementsandcanonlybemetwithCET1capital.Thecapitalconservationbufferis2.5%ofRWAFootnote14.Table4providestheminimumcapitalratiosplusthe2.5%capitalconversationbuffer.[BaselFramework,RBC30.2] Table4:Capitalconservationbuffer(as%ofRWA) Capitalconservationbuffer2.5%Minimumcapitalratiosplusthe2.5%capitalconservationbufferCET17.0%Tier18.5%Total10.5%Capitaldistributionconstraintswillbeimposedonaninstitutionwhencapitallevelsfallwithinthebufferconservationrange.Institutionswillbeabletoconductbusinessasnormalwhentheircapitallevelsfallwithinthebufferrangeastheyexperiencelosses.Theconstraintsimposedrelateonlytodistributions,nottheoperationsoftheinstitution.Thedistributionconstraintsincreaseasinstitutions'capitallevelsapproachtheminimumrequirements.Bydesign,theconstraintsimposedoninstitutionswithcapitallevelsatthetopoftherangewouldbeminimal.Thisreflectsanexpectationthatinstitutions'capitallevelsmayfallintothisrangefromtimetotime.[BaselFramework,RBC30.2and30.3]Table5setsouttheminimumcapitalconservationratiosaninstitutionmustmeetatvariouslevelsofCET1capitalFootnote15.Theapplicableconservationratiomustberecalculatedateachdistributiondate.Onceimposed,conservationratioswillremaininplaceuntilsuchtimeascapitalratioshavebeenrestored.IfaninstitutionwantstomakepaymentsinexcessoftheconstraintssetoutinTable5,sufficientcapitalmustberaisedintheprivatesectortofullycompensatefortheexcessdistribution.ThisalternativeshouldbediscussedwithOSFIaspartofaninstitution'sInternalCapitalAdequacyAssessmentProcess(ICAAP).Forthepurposesofdeterminingtheminimumcapitalconservationratio,theCET1ratioincludesamountsusedtomeetthe4.5%minimumCET1requirement,butexcludesanyadditionalCET1neededtomeetthe6%Tier1and8%TotalCapitalrequirements,aswellasanyCET1capitalneededtomeetD-SIBs'TotalLossAbsorbingCapacity(TLAC)requirementswhereapplicable.Forexample,aninstitutionwith8%CET1andnoAdditionalTier1orTier2capitalwouldmeetallminimumcapitalrequirements,butwouldhavea0%capitalconservationbufferandthereforebesubjecttothe100%constraintoncapitaldistributions.[BaselFramework,RBC30.4] Table5:MinimumcapitalconservationratiosforcorrespondinglevelsofCET1 CET1RatioMinimumCapitalConservationRatios (expressedaspercentageofearnings)4.5%-5.125%100%>5.125%-5.75%80%>5.75%-6.375%60%>6.375%-7.0%40%>7.0%0%Ifaninstitution'scapitalratiofallsbelowthelevelssetoutinTable4,capitalconservationratioswillbeimposedthatautomaticallylimitdistributions.AsoutlinedinTable5,theselimitsincreaseasaninstitution'scapitallevelsapproachtheminimumrequirements.Forexample,aninstitutionwithaCET1capitalratiointherangeof5.125%to5.75%wouldberequiredtomaintaintheequivalentof80%ofitsearningsinthesubsequentpaymentperiod(i.e.payoutnomorethan20%incapitaldistributions).Forclarity,whereaninstitution'sdisclosedratioiswithintherangeswhererestrictionsapply,distributionsforthefollowingpaymentperiodwillbeconstrainedbasedonthemostrecentlyreportedratioirrespectiveofthecurrentcapitalpositionoftheinstitution.Restrictionswillremaininplaceuntilthecapitalconservationbufferisrestored.[BaselFramework,RBC30.4]Itemsconsideredtobedistributionsincludedividendsandsharebuybacks,discretionarypaymentsonCET1andAdditionalTier1capitalinstrumentsanddiscretionarybonuspaymentstostaff.PaymentsthatdonotresultinadepletionofCET1,whichmayforexampleincludecertainstockdividends,arenotconsidereddistributions.Thedistributionrestrictionsdonotapplytodividendswhichsatisfyallofthefollowingconditions:thedividendscannotlegallybecancelledbytheinstitution;thedividendshavealreadybeenremovedfromCET1;andthedividendsweredeclaredinaccordancewiththeapplicablecapitalconservationratiosetoutinTable5atthetimeofthedeclaration.[BaselFramework,RBC30.5]Earningsaredefinedasdistributableprofitscalculatedpriortothedeductionofelementssubjecttotherestrictionondistributions.Earningsarecalculatedafterthetaxwhichwouldhavebeenreportedhadnoneofthedistributableitemsbeenpaid.Assuch,anytaximpactsofmakingsuchdistributionsarereversedout.WhereaninstitutiondoesnothavepositiveearningsandhasashortfallinitsCET1,Tier1,orTotalCapitalratio,itwillberestrictedfrommakingpositivenetdistributions.[BaselFramework,RBC30.5]1.7.2.CountercyclicalBufferThecountercyclicalbufferaimstoensurethatbankingsectorcapitalrequirementstakeaccountofthemacro-financialenvironmentinwhichinstitutionsoperate.Itwillbedeployedwhenexcessaggregatecreditgrowthisjudgedtobeassociatedwithabuild-upofsystem-widerisktoensurethebankingsystemhasabufferofcapitaltoprotectitagainstfuturepotentiallosses.[BaselFramework,RBC30.7]Thecountercyclicalbufferregimeconsists,inCanada,ofthefollowingelements:OSFI,inconsultationwithitsSeniorAdvisoryCommitteeFootnote16(SAC)partners,willmonitorcreditgrowthandotherindicatorsFootnote17thatmaysignalabuild-upofsystem-widerisksFootnote18andmakeanassessmentofwhethercreditgrowthisexcessiveandisleadingtothebuild-upofsystem-widerisks.Basedonthisassessment,acountercyclicalbufferrequirement,rangingfrom0%to2.5%oftotalrisk-weightedassetsFootnote19,willbeputinplacewhencircumstanceswarrant.ThisrequirementwillbereleasedwhenOSFI,inconsultationwithitsSACpartners,assessesthatsystem-wideriskshavedissipatedorcrystallized.InstitutionswithprivatesectorcreditexposuresoutsideCanadawilllookatthegeographiclocationofthoseexposuresandcalculatetheirconsolidatedcountercyclicalbufferrequirementasaweightedaverageofthecountercyclicalbuffersthatarebeingappliedinjurisdictionstowhichtheyhavecreditexposures.Thecountercyclicalbuffertowhichtheinstitutionissubjectwillbeimplementedbywayofanextensionofthecapitalconservationbufferdescribedinsection1.7.1.Institutionswillbesubjecttorestrictionsondistributionsofearningsiftheybreachtheextendedbuffer.[BaselFramework,RBC30.8]InstitutionsmustmeetthecountercyclicalbufferwithCET1.Consistentwiththecapitalconservationbuffer,theCET1ratiointhiscontextincludesamountsusedtomeetthe4.5%minimumCET1requirement,butexcludesanyadditionalCET1neededtomeetthe6%Tier1and8%TotalCapitalrequirementsaswellasD-SIBs'minimum21.5%TLACrequirement.[BaselFramework,RBC30.17]Table6providestheminimumcapitalconservationratiosaninstitutionmustmeetatvariouslevelsoftheCET1capitalratioFootnote20.[BaselFramework,RBC30.17] Table6:Individualinstitutionminimumcapitalconservationstandards CET1MinimumCapitalConservationRatios (expressedasapercentageofearnings)Withinfirstquartileofbuffer100%Withinsecondquartileofbuffer80%Withinthirdquartileofbuffer60%Withinfourthquartileofbuffer40%Abovetopofbuffer0%TheconsolidatedcountercyclicalbufferwillbeaweightedaverageofthebuffersdeployedinCanadaandacrossBCBSmemberjurisdictionsandselectednon-memberjurisdictionsFootnote21towhichtheinstitutionhasprivatesectorcreditexposures.[BaselFramework,RBC30.14]Institutionswilllookatthegeographiclocationoftheirprivatesectorcreditexposuresandcalculatetheirconsolidatedcountercyclicalbufferasaweightedaverageofthebuffersthatarebeingappliedineachjurisdictiontowhichtheyhavesuchexposures.ThebufferthatwillapplytoaninstitutionwillthusreflectthegeographiccompositionofitsportfolioofprivatesectorcreditexposuresFootnote22.[BaselFramework,RBC30.13]Theweightingappliedtothebufferinplaceineachjurisdictionwillbetheinstitution'screditriskRWAthatrelatestoprivatesectorcreditexposuresinthatjurisdictiondividedbytheinstitution'screditriskRWAthatrelatestoprivatesectorcreditexposuresacrossalljurisdictionsFootnote23.[BaselFramework,RBC30.14]Institutionswillbesubjecttoaconsolidatedcountercyclicalbufferthatvariesbetween0%,wherenojurisdictioninwhichtheinstitutionhasprivatesectorcreditexposureshasactivatedabuffer,and2.5%oftotalRWAFootnote24.TheconsolidatedcountercyclicalbufferappliestoconsolidatedtotalRWA(includingcredit,market,andoperationalrisk)asusedinthecalculationofallrisk-basedcapitalratios,consistentwithitbeinganextensionofthecapitalconservationbuffer.[BaselFramework,RBC30.12FAQ1]Privatesectorcreditexposuresinthiscontextreferstoexposurestoprivatesectorcounterparties,includingnon-bankfinancialsectorcounterparties,whichattractacreditriskcapitalchargeinthebankingbookandtherisk-weightedequivalenttradingbookcapitalchargesforspecificrisk,theincrementalriskcharge,andsecuritization.Interbankexposuresandexposurestothepublicsectorareexcluded.[BaselFramework,RBC30.13FAQ1]Whenconsideringthejurisdictiontowhichaprivatesectorcreditexposurerelates,institutionsshoulduseanultimateriskbasis.UltimateriskreferstothejurisdictionwherethefinalriskliesFootnote25asopposedtothejurisdictionoftheimmediatecounterpartiesorwheretheexposureisbooked.[BaselFramework,RBC30.14]Thedecisiontoactivate,increase,decreaseorreleasethecountercyclicalbufferwillbeformallycommunicated.TheSuperintendentmayexemptgroupsofinstitutions,otherthanD-SIBsandforeignbanksubsidiariesinCanada,fromthecountercyclicalbufferrequirementsiftheapplicationwouldnotmeetthestatedobjectivesofthecountercyclicalbufferFootnote26,Footnote27.ThescopeofapplicationandtherationalewouldbedescribedintheOSFIcommunication.Togiveinstitutionstimetoadjusttoabufferlevel,OSFIwillpre-announceitsdecision,toactivateorraisethelevelofthecountercyclicalbuffer,byupto12monthsbutnolessthan6months.Conversely,decisionstoreleasethecountercyclicalbufferwillnormallytakeeffectimmediately.Institutionswithforeignexposuresareexpectedtomatchhostjurisdictions'implementationtimelinesunlesstheannouncementperiodisshorterthan6monthsinwhichcasecompliancewillonlyberequired6monthsafterthehost'sannouncementFootnote28.[BaselFramework,RBC30.11]Themaximumcountercyclicalbufferrelatingtoforeignprivatesectorcreditexposureswillbe2.5%oftotalRWAsFootnote29.Jurisdictionsmaychoosetoimplementabufferinexcessof2.5%,ifdeemedappropriateintheirnationalcontext;insuchcasestheinternationalreciprocityprovisionswillnotapplytotheadditionalamounts.Inaddition,institutionsarenotexpectedtoreplicatesectoralbuffersorsimilarmeasuresadoptedbyforeignjurisdictionsthatdepartfromtheinternationallyagreedcountercyclicalbuffer.[BaselFramework,RBC30.9]Institutionsmustensurethattheircountercyclicalbufferiscalculatedandpubliclydisclosedwithatleastthesamefrequencyastheirminimumcapitalrequirements.Inaddition,whendisclosingtheirbuffers,ifany,institutionsmustalsodisclosethegeographicbreakdownoftheirprivatesectorcreditexposuresusedinthecalculationofthebuffer.[BaselFramework,RBC30.19]1.8.DomesticSystemicallyImportantBank(D-SIB)SurchargeOSFIhasdesignatedsixCanadianinstitutionsasD-SIBs:BankofMontreal,BankofNovaScotia,CanadianImperialBankofCommerce,NationalBankofCanada,RoyalBankofCanada,andToronto-DominionBankFootnote30.D-SIBswillbesubjecttoaCET1surchargeequalto1%ofRWAs.The1%capitalsurchargewillbeperiodicallyreviewedinlightofnationalandinternationaldevelopments.ThisisconsistentwiththelevelsandtimingsetoutintheBCBSD-SIBframework.[BCBSConsolidatedframeworkRBC40.7to40.23]The1%surchargewillbeimplementedthroughanextensionofthecapitalconservationbuffer.Thisisinlinewiththetreatmentofthehigherlossabsorbencyrequirementforglobalsystemicallyimportantbanks(G-SIBs)prescribedbytheBCBSFootnote31.Table7belowsetsouttheminimumcapitalconservationratiosaD-SIBmustmeetatvariousCET1capitalratiosandTier1leverageratiosFootnote32.D-SIBswillthusbesubjecttoapre-determinedsetofrestrictionsontheabilitytomakedistributions,suchasdividendsandsharebuy-backs,iftheydonotmeettheserequirements(seerelevantprovisionsofsection1.7.1). Table7:MinimumcapitalconservationratiosforD-SIBsatvariousrangesofCET1orTier1LeverageRatios CET1RatioTier1Leverage RatioMinimumCapitalConservation Ratio4.5%-5.375%3%–3.125%100%>5.375%-6.250%>3.125%–3.25%80%>6.250%-7.125%>3.25%–3.375%60%>7.125%-8.0%>3.375%–3.50%40%>8.0%>3.50%0%1.9.DomesticStabilityBufferInadditiontothebuffersdescribedinsections1.7.1,1.7.2,and1.8,D-SIBsaresubjecttoaDomesticStabilityBuffer(DSB)Footnote33.TheDSBisintendedtocoverarangeofsystemicvulnerabilitiesthat,inOSFI'ssupervisoryjudgement,arenotadequatelycapturedinthePillar1capitalrequirementsdescribedinthisguideline.InadditiontotheDSB,D-SIBsmayberequiredtoholdfurtherPillarIIcapital,aswarranted,toaddressidiosyncraticorsystemicrisksthatarenotadequatelycapturedbythePillarIrequirementsandbuffers.DecisionsonthecalibrationoftheDSBarebasedonsupervisoryjudgement,informedbyanalyticalworkonarangeofvulnerabilities,andaremadeinconsultationwiththeFinancialInstitutionsSupervisoryCommittee(FISC)Footnote34.TheleveloftheDSBwillrangebetween0and2.5%ofaD-SIB'stotalRWAcalculatedunderthisguideline.TheleveloftheDSBwillbethesameforallD-SIBsandmustbemetwithCET1capital.Unliketheotherbuffersdescribedinthisguideline,theDSBisnotaPillar1bufferandbreacheswillnotresultinD-SIBsbeingsubjecttotheautomaticconstraintsoncapitaldistributionsdescribedinsection1.7.IfaD-SIBbreachesthebuffer(i.e.dipsintothebufferwhenithasnotbeenreleased),OSFIwillrequirearemediationplan.SupervisoryinterventionspursuanttoOSFI'sGuidetoInterventionFootnote35wouldoccurincaseswherearemediationplanisnotproducedorexecutedinatimelymannersatisfactorytoOSFI.D-SIBsshouldtakeintoaccounttheDSBintheirinternalcapitalplanningprocess.Additionally,D-SIBsshouldreporttheDSBintheirquarterlypublicdisclosures,andincludeabriefnarrativeonanychangestothebufferlevel.BreachesofthebufferbyanindividualD-SIBwillrequirepublicdisclosurepursuanttoInternationalFinancialReportingStandards(IFRS).ThespecificvulnerabilitiescoveredbytheDSBareexpectedtoevolveovertime,astheyarebasedoncurrentmarketconditionsincombinationwithforward-lookingexpectationsaroundthematerializationofriskstokeyvulnerabilities,andwillbecommunicatedaspartofthesemi-annualDSBlevel-settingannouncements.Thedecisiontoincludeavulnerabilitywillbebasedonwhetheritismeasurable,material,cyclicalandhasasystem-wideimpactthatcouldmaterializeintheforeseeablefuture.OSFIwillundertakeareviewofthebufferonasemi-annualbasis,andanychangestothebufferwillbemadepublic,inJuneandDecember,alongwithsupportingrationale.Inexceptionalcircumstances,OSFImaymakeandannounceadjustmentstothebufferin-betweenscheduledreviewdates.TransparencyinsettingtheDSBwillsupportinstitutions'abilitytousethiscapitalintimesofstressbyimprovingtheunderstandingofthepurposeofthebufferandhowitshouldbeused.DecreasesofthebuffermayoccurinasituationwhenOSFIidentifiesthatD-SIBs'exposurestothevulnerabilitieshavediminishedorthatriskshavematerialized.Inthelattercase,adecreasewouldbeintendedtoallowD-SIBstocontinuetoprovideloansandservicestocreditworthyhouseholdsandbusinessesand/ortoincurlosseswithoutbreachingtheircapitaltargets.IncreasestothebuffermayoccurwhenOSFIisoftheviewthatitwouldbeprudentforD-SIBstoholdadditionalcapitaltoprotectagainsttheidentifiedvulnerabilities.Increaseswillbesubjecttoaphase-inperiod;decreaseswillbeeffectiveimmediately.1.10.CapitalTargetsInadditiontotheminimumcapitalrequirementsdescribedinsection1.6,OSFIexpectsallinstitutionstomaintaintargetcapitalratiosequaltoorgreaterthantheminimumcapitalratiosplustheconservationbufferFootnote36.ForSMSBs,thismeanstargetratiosofatleast7%forCET1,8.5%forTier1and10.5%forTotalcapital.D-SIBsareexpectedtomaintaintargetcapitalratiosequaltoorgreaterthantheminimumcapitalratiosplusthesumoftheconservationbuffer,theD-SIBsurchargeandtheDSB.ForD-SIBs,thisequatestotargetratiosofleast8%forCET1,9.5%forTier1,and11.5%forTotalcapitalplustheDSBFootnote37.ThetargetcapitalratiosforSMSBsandD-SIBsaresummarizedbelowinTable8belowandillustratedinAnnex2. Table8:TargetCapitalRatios SMSBsD-SIBsTargetCET1capital7.0%8.0%plusDSBTargetTier1capital8.5%9.5%plusDSBTargetTotalcapital10.5%11.5%plusDSBThesetargetsareapplicabletoallinstitutionsandaretriggersforsupervisoryinterventionconsistentwithOSFI'sGuidetoInterventionFootnote38.Ifaninstitutionisoff-sidetherelevanttargetratios,supervisoryactionwillbetakenproportionaltotheshortfallandcircumstancesthatcausedtheshortfallandmayincludearangeofactions,including,butnotlimitedto,restrictionsondistributions.TheSuperintendentmaysethighertargetcapitalratiosforindividualinstitutionsorgroupsofinstitutionswherecircumstanceswarrant,includinginrespectofidiosyncraticand/orsystemicrisksthatarenotadequatelycapturedbyinstitutions'PillarIcapitalrequirementsandbuffers.TheneedforPillarIIcapitalandcorrespondinghighertargetcapitalratioswouldconsiderhowrobustexistingcapitalratiosareinlightofaninstitution'sallowances,stresstestingprogram,andICAAPresultsFootnote39.Annex1DomesticSystemicImportanceandCapitalTargetsTheframeworkFootnote40fordealingwithD-SIBssetoutbytheBCBSindicatesthatdomesticsystemicimportanceshouldbeassessedwithreferencetotheimpactthataninstitution'sfailurecouldhaveonthedomesticeconomy.Further,itnotesthatthisassessmentshouldconsiderinstitution-specificcharacteristicsofsystemicimportance,suchassize,inter-connectednessandsubstitutability,whicharecorrelatedwiththesystemicimpactoffailure.Accordingly,OSFI'sassessmentofdomesticsystemicimportanceforCanadianinstitutionsconsidersarangeofindicatorssuchasassetsize,intra-financialclaimsandliabilities,andaninstitution'srolesindomesticfinancialmarketsandinfinancialinfrastructures.ThissectiondescribesOSFI'sinferencesfromvariousmeasuresofsystemicimportance.SizeIngeneral,aninstitution'sdistressorfailureismorelikelytodamagetheCanadianfinancialsystemoreconomyifitsactivitiescomprisealargeshareofdomesticbankingactivity.WhenCanadianinstitutionsarecomparedaccordingtotheirsizeasmeasuredbytotalconsolidatedassets,andbyplaceofbookingofassets,thatis,accordingtowhethertheassetsarebookedinCanadaorabroad,thedatashowthat:thelargestsixbanksaccountformorethan90%totalbankingassets;thedifferencesamongthelargestbanksaresmallerifonlydomesticassetsareconsidered;andrelativesystemicimportancedeclinesrapidlyafterthetopfivebanksandafterthesixthbank.Inter-connectionsThemoreinter-connectedaninstitutionistootherfinancialinstitutions,thegreateristhepotentialforthefailureofthatinstitutiontotransmitproblemsthroughoutthefinancialsystemandtothebroadereconomy.Asaresult,measurementsofinter-connectednessalsoinforminstitutions'systemicimportance.ComparingCanadianinstitutionsaccordingtomeasuresofintra-financialassets(i.e.claimsonotherfinancialinstitutions)andintra-financialliabilities(i.e.obligationstootherfinancialinstitutions)againpointstothedominanceofthelargestCanadianbanks.Therank-orderingamongthesebanks,however,dependsonthespecificinter-connectednessmeasureunderconsideration.SubstitutabilityThesystemicimpactofaninstitution'sdistressorfailureisgreaterthelesseasilyitcanbereplacedasbothamarketparticipantandafinancialserviceprovider.Asaresult,OSFI'sidentificationofD-SIBsalsotakesintoaccountthetypesofrolesthatinstitutionsplayindomesticfinancialmarketsandindomesticfinancialinfrastructures,whichinformviewsregardingsubstitutability.Forexample,thisincludesunderwriterrankingsinCanadianfinancialmarkets,andaninstitution'ssharesofCanadiandollarpaymentsmadethroughCanada'sLargeValueTransferSystem(LVTS)andtheAutomatedClearingandSettlementSystem(ACSS)Footnote41.Again,activityandvolumeinbothLVTSandACSSaredominatedbythelargestCanadianbanks,andbankrelativeimportancevariesaccordingtothemeasureofinterest.ThelargestbanksarealsothedominantparticipantsinCDSX,theclearingandsettlementsystemforsecuritiestransactionsinCanada.SomelargeCanadianbanksalsoplaykeyrolesasmembersoftheCLSBank,theglobalinstitutionthatsettlesforeignexchangetransactionsbetweenbanksinCanadiandollarsandothermajorcurrenciesFootnote42.Forexample,theRoyalBankofCanadaandtheCanadianImperialBankofCommercearethekeyCanadian-dollarliquidityprovidersforsettlingCanadiandollarforeignexchangetransactionsthroughtheCLSnetwork.Avarietyofadditionalinformationhasbeenassessedandrecurringthemesacrosstherangeofevidencearethefollowing:ThefivelargestbanksarebyfarthedominantbanksinCanada,andconsistentlyplaycentralrolesinarangeofactivitiesintheCanadianfinancialsystem;andTherank-orderimportanceofthelargestbanks,aswellastherelativedifferencesbetweenthem,variessomewhataccordingtothemeasureconsidered.Thissuggeststhattherearestronggroundsfortreatingthesebanksinthesameway,ratherthanrelyingonarbitraryweightstodevelopasingleindexofsystemicimportance.Further,distinguishingreliablybetweentheadverseeffectsontheCanadianeconomyfromindividualD-SIBfailuresislargelymoot,giventhedifficultyofcrediblydifferentiatingbetweenthelargeadverseimpactsontheCanadianeconomyfromthefailureofanyoneofthelargestbanks.ThisalsoarguesagainstmakingdistinctionsbetweenidentifiedCanadianD-SIBstoassigndegreesofsystemicimportance.Giventhesevariousconsiderations,theCanadianD-SIBsarejudgedtobeBankofMontreal,TheBankofNovaScotia,CanadianImperialBankofCommerce,RoyalBankofCanada,andTheToronto-DominionBank,withoutfurtherdistinctionbetweenthem.NationalBankofCanadahasalsobeendesignatedasaD-SIBgivenitsimportancerelativetootherlessprominentbanksandintheinterestofprudencegiventheinherentchallengesinidentifyingaheadoftimewhichbanksarelikelytobesystemicintimesofstress.ThedesignationofD-SIBstatuswillbeperiodicallyreviewedandupdatedasneeded.HigherLossAbsorbencyTargetsThegoalofahigherlossabsorbencytargetistoreducefurthertheprobabilityoffailureofaD-SIBrelativetonon-systemicinstitutions,reflectingthegreaterimpactthataD-SIBfailuremayhaveonthedomesticfinancialsystemandtheeconomy.ThissurchargetakesintoaccountthestructureoftheCanadianfinancialsystem,theimportanceoflargebankstothefinancialarchitecture,andtheexpandedregulatorytoolkitrequiredtoresolveatroubledfinancialinstitution.TheBCBSD-SIBframeworkprovidesfornationaldiscretiontoaccommodatecharacteristicsofthedomesticfinancialsystemandotherlocalfeatures,includingthedomesticpolicyframework.Theadditionalcapitalsurchargeforbanksdesignatedassystemicallyimportantprovidescredibleadditionallossabsorbencygiven:extremelosseventsasapercentageofRWAamongthispeergroupoverthepast25yearswouldbelessthanthecombinationoftheCET1(2.5%)capitalconservationbufferandanadditional1%;andcurrentbusinessmodelsofthesixlargestbanksaregenerallylessexposedtothefattailedrisksassociatedwithinvestmentbankingthansomeinternationalpeers,andthesixlargestbankshaveagreaterrelianceonretailfundingmodelscomparedtowholesalefundingthansomeinternationalpeers–featuresthatprovedbeneficialinlightoftheexperienceofthe2008-2009financialcrisis.Fromaforwardlookingperspective:CanadianD-SIBsthatholdcapitalatcurrenttargetsplusa1%surcharge(i.e.8%)shouldbeabletoweatherawiderangeofseverebutplausibleshockswithoutbecomingnon-viable;andthehigherlossabsorbencyinacrisisscenarioachievedbytheconversiontocommonequity)ofthe2%to3%inAdditionalTier1andTier2NVCCcapitalinstrumentspromotedbyBaselIIIalsoaddstotheresiliencyofbanks.RelationshipwithBaselCommitteeG-SIBFrameworkOSFIhasadoptedtheBaselCommittee'sframeworkontheassessmentmethodologyforG-SIBs.TheassessmentmethodologyforG-SIBsfollowsanindicator-basedapproachagreedbytheBCBSthatwilldeterminewhichinstitutionsaretobedesignatedasG-SIBsandsubjecttoadditionallossabsorbencyrequirementsthatrangefrom1%to3.5%RWA,dependingonaninstitution'sglobalsystemicimportanceFootnote43.ForCanadianD-SIBsthatarealsodesignatedasG-SIBs,thehigheroftheD-SIBandG-SIBsurchargeswillapplyFootnote44.SupervisoryImplicationsCanadianD-SIBsareexpectedtohaveadvancedpracticesintermsofthedesignandoperationofoversightfunctionsandinternalcontrols.OSFIexpectsthesepracticestocontinuetoimproveassupervisionbecomesmoreintensiveandinternationalbestpracticesevolve.TheinstitutionsdesignatedasD-SIBshavehistoricallyhad,andwillcontinuetobesubjectto,moreintensivesupervisionbecauseoftheirlargersize,broaderandmorecomplexbusinessmodelsandconsequentlymoresignificantriskprofiles.TheprinciplesofriskbasedsupervisoryintensityarereflectedinOSFI'sSupervisoryFrameworkFootnote45.TheFrameworkisappliedonaconsolidatedbasistoallCanadianinstitutionsandrequiresOSFIsupervisorstodeterminethelevel,extentandintensityofthesupervisionofinstitutionsbasedonthesize,nature,complexityandriskprofileoftheinstitution.OSFI'senhancedsupervisionofD-SIBsincludesthefollowing:extensiveuseofsupervisorycollegestoshareandcoordinatesupervision,includingtheexecutionofsupervisoryplans,withtherelevanthostcountryauthoritiesofCanadianD-SIBs'majorforeignsubsidiariesandaffiliates;greaterfrequencyandintensityofon-andoff-sitemonitoringofinstitutions'riskmanagementactivitiesandcorporategovernance,includingmoregranularreportingtoOSFIandmorestructuredinteractionswithboardsandseniormanagement;moreextensiveuseofspecialistexpertiserelatingtocreditrisk,marketrisk,operationalrisk,corporategovernance,andAML/compliance;strongercontrolexpectationsforimportantbusinesses,includingtheuseof'advanced'approachescredit,marketandoperationalrisks;greateruseofcross-institutionreviews,bothdomesticallyandinternationally,inordertoconfirmtheuseofgoodriskmanagement,corporategovernanceanddisclosurepractices;selectiveuseofexternalreviewstobenchmarkleadingrisk-controlpractices,especiallyforinstanceswherebestpracticesmayresideoutsideCanada;regularuseofstressteststoinformcapitalandliquidityassessments;setting,monitoring,andenforcingminimumandtargetTLACratiosassetoutinOSFI'sTLACGuideline;andassessingD-SIBs'recoveryandresolutionplans,aswellasdiscussionofsuchplanswithFISCpartnersandatcrisismanagementgroupsFootnote46.InformationDisclosurePracticesCanadianD-SIBsareexpectedtohavepublicinformationdisclosurepracticescoveringtheirfinancialconditionandriskmanagementactivitiesthatareamongthebestoftheirinternationalpeersFootnote47.Enhanceddisclosureofinstitutions'riskmodelsandriskmanagementpracticescanplayahelpfulroleinenhancingmarketconfidence.Asaresult,D-SIBsareexpectedtoadopttherecommendationsoftheFinancialStabilityBoard's(FSB)EnhancedDisclosureTaskForceFootnote48,futuredisclosurerecommendationsinthebankingarenathatareendorsedbyinternationalstandardsettersandtheFSB,aswellasevolvingdomesticandinternationalbankriskdisclosurebestpractices.Annex2SupervisoryTargetCapitalRequirements  DTIsCapitalExpectations(percentageofriskweightassets)–TextDescription Thisfigureshowsthecapitalrequirementsforbigbanksandsmallandmediumsizedbanksintwocolumns.Forbothbigbanks,andsmallandmediumsizedbanks,theminimumtotalcapitalrequirementsare8%ofriskweightedassetsandthePillar1buffersarefrom8%to10.5%.Bigbanksarealsorequiredtoholdafurther1%inPillar1capitalfrom10.5%to11.5%fortheDomesticSystemicallyImportantBanksurcharge.Pillar2buffersforbigbanksincludeanadditional1%DomesticStabilityBuffer(asatMay1,2020)aswellasbankspecificbuffersinexcessofthisamount.Pillar2buffersforsmallandmediumsizedbanksarebankspecificbuffersinexcessof10.5%.     Notes:ThesizeofBank-SpecificPillarIIbufferswillvarybyinstitutionastheyaredeterminedbyeachinstitution.Whereapplicable,thesizeofinstitutions'CountercyclicalBufferadd-onswillvary.CalibrationoftheDSBisreviewedbyOSFIsemi-annuallyandissetbetween0%to2.5%ofRWA.ForCategoryIIISMSBs,theDTIcapitalexpectationsinthechartareasa%of[AdjustedTotalAssets+RWAOperationalRisk] Footnotes Footnote1ForinstitutionswithafiscalyearendingOctober31orDecember31,respectivelyReturntofootnote1Footnote2Thecapitalandleveragerequirementsfordomesticsystemically-importantbanksaresupplementedbytherequirementsdescribedinOSFI'sTotalLossAbsorbingCapacity(TLAC)Guideline.Returntofootnote2Footnote3https://www.bis.org/basel_framework/index.htmReturntofootnote3Footnote4Followingtheformat:[BaselFramework,XXXyy.zz]Returntofootnote4Footnote5SMSBsarebanks(includingfederalcreditunions),bankholdingcompanies,federallyregulatedtrustcompanies,andfederallyregulatedloancompaniesthathavenotbeendesignatedbyOSFIasdomesticsystemicallyimportantbanks(D-SIBs).ThisincludessubsidiariesofSMSBsorD-SIBsthatarebanks(includingfederalcreditunions),federallyregulatedtrustcompaniesorfederallyregulatedloancompanies.Returntofootnote5Footnote6https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/SMSB.aspxReturntofootnote6Footnote7ThisincludesassetsandliabilitiesbookedoutsideofCanadaaswellasassetsandliabilitiesofnon-residentsbookedinCanada.Returntofootnote7Footnote8Adjustedgrossincomeisdefinedinsection3.3Returntofootnote8Footnote9https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/adv-prv/Pages/imp_note_a1.aspxReturntofootnote9Footnote10TheUseofRatingsandEstimatesofDefaultandLossatIRBInstitutions–ImplementationNote:https://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/adv-prv/Pages/Rat_Loss_Ja06.aspxReturntofootnote10Footnote11ForinstitutionswithafiscalyearendingOctober31orDecember31,respectively.Returntofootnote11Footnote12Therearetwoexceptionstothisrule.OneisthatbankswhohaveapprovaltousetheIMMandwhoarecurrentlyusingtheStandardizedCVA(S-CVA)approacharepermittedtousetheIMMEADsandmaturitiesinthecalculationoftheS-CVAforpurposesofthecapitalfloor.TheotheristhatbankscurrentlyusingtheAdvancedCVA(A-CVA)approachforpurposesofthecapitalfloormaycontinuetodoso.BothoftheseexceptionsexpirewhentherevisedCVAframeworkisimplementedinthefirstfiscalquarterof2024.Returntofootnote12Footnote13Appliesonlytoperformancebonusesissuedtoinstitutions'seniormanagement.Theterm"seniormanagement"isdefinedinOSFI'sCorporateGovernanceGuideline.Returntofootnote13Footnote14ForCategoryIIISMSBs,thecapitalconservationbufferis2.5%of[AdjustedTotalAssets+RWAOperationalRisk]Returntofootnote14Footnote15SimilarcapitalconservationratiosapplywhereaninstitutionbreachesitsTier1capitalorTotalcapitalrequirements.Intheeventthataninstitutionsimultaneouslybreachesmorethanonecapitalrequirement(e.g.7%CET1,8.5%Tier1,10.5%Totalcapital)itmustapplythemostconstrainingcapitalconservationratio.Returntofootnote15Footnote16SACisanon-statutorybodychairedbytheDeputyMinisterofFinance.ItsmembershipisthesameastheFinancialInstitutionsSupervisoryCommittee("FISC"),i.e.OSFI,theDepartmentofFinance,theBankofCanada,theCanadaDepositInsuranceCorporation,andtheFinancialConsumerAgencyofCanada.TheSACoperatesasaconsultativebodyandprovidesaforumforpolicydiscussiononissuespertainingtothefinancialsector.Returntofootnote16Footnote17ThedocumententitledGuidancefornationalauthoritiesoperatingthecountercyclicalcapitalbuffer,availableatwww.bis.org/publ/bcbs187.pdf,setsouttheprinciplesthatnationalauthoritieshaveagreedtofollowinmakingbufferdecisions.Thisdocumentprovidesinformationthatshouldhelpinstitutionstounderstandandanticipatethebufferdecisionsmadebynationalauthoritiesinthejurisdictionstowhichtheyhavecreditexposures.[BCBSConsolidatedframeworkRBC30.10]Returntofootnote17Footnote18TheBankofCanadawillbetheprimarysourceofpublicinformationonmacro-financialdevelopmentsandthestateofvulnerabilitiesinCanadawithregardtothecountercyclicalbuffer,includingaspublishedinitsFinancialSystemReview(FSR).Returntofootnote18Footnote19ForCategoryIIISMSBs,thecountercyclicalbufferrequirementwouldbeappliedasa%of[AdjustedTotalAssets+RWAOperationalRisk]Returntofootnote19Footnote20SimilarconstraintsapplywithrespecttobreachesofTier1capitalandTotalcapitalrequirements.Institutionsshouldapplythemostconstrainingcapitalconservationratiowheretheybreachmorethanonerequirement.Returntofootnote20Footnote21InstitutionsareexpectedtoreciprocatethebuffersimplementedbyeveryjurisdictionlistedonthededicatedpageoftheBISwebsite:http://www.bis.org/bcbs/ccyb/index.htm.Reciprocityismandatory,forallBaselCommitteememberjurisdictions,uptoamaximumof2.5%RWA,irrespectiveofwhetherhostauthoritiesrequireahigheradd-on.[BCBSConsolidatedframeworkRBC30.13FAQ3andFAQ4]Returntofootnote21Footnote22Thegeographiclocationofaninstitution'sprivatesectorexposuresisdeterminedbythelocationofthecounterpartiesthatmakeupthecapitalchargeirrespectiveoftheinstitution'sownphysicallocationoritscountryofincorporation.Thelocationisidentifiedaccordingtotheconceptofultimaterisk(i.e.basedonthecountrywherethefinalrisklies,notwheretheexposurehasbeenbooked).Thegeographiclocationidentifiesthejurisdictionwhoseannouncedcountercyclicalbufferadd-onistobeappliedbytheinstitutiontothecorrespondingcreditexposure,appropriatelyweighted.[BCBSConsolidatedframeworkRBC30.13FAQ2and30.14FAQ1]Returntofootnote22Footnote23ForCategoryIIISMSBs,theweightingwillbebasedontheinstitution'sprivatesectorcreditexposuresinaparticularjurisdictiondividedbyitstotalprivatesectorcreditexposuresacrossalljurisdictions.Returntofootnote23Footnote24ForCategoryIIISMSBs,theconsolidatedcountercyclicalbufferrequirementwouldbeappliedasa%of[AdjustedTotalAssets+RWAOperationalRisk].Returntofootnote24Footnote25Forpurposesofdeterminingthecountryofresidenceoftheultimateobligor,guaranteesandcreditderivativesareconsideredbutnotcollateralwiththeexceptionofexposureswherethelenderlooksprimarilytotherevenuesgeneratedbythecollateral,bothasthesourceofrepaymentandassecurityfortheexposure,suchasProjectFinance.Thelocationofasecuritizationexposureisthelocationoftheunderlyingobligoror,wheretheexposuresarelocatedinmorethanonejurisdiction,theinstitutioncanallocatetheexposuretothecountrywiththelargestaggregateunpaidprincipalbalance.Returntofootnote25Footnote26TheSuperintendentwillconsiderfactorssuchaswhetheraninstitution'sbusinessmodelinvolvesprovidingcreditthroughintermediationoffundsorwhethertheconditionsthatgiverisetofinancialsystem-wideissuesareexplicitlyaddressedinarobustmannerintheinstitution'sinternalcapitaltargets.Returntofootnote26Footnote27ThecountercyclicalbufferistobecomputedandappliedattheconsolidatedFRFIparentlevel,i.e.OSFIregulateddeposit-takinginstitutionswhoaresubsidiariesofanOSFIregulateddeposit-takinginstitutionarenotsubjecttothecountercyclicalbuffer.Returntofootnote27Footnote28Thepre-announcedbufferdecisionandactualbufferinplacewillbepublishedontheBISwebsite.Returntofootnote28Footnote29ForCategoryIIISMSBs,thecountercyclicalbufferwouldbeappliedasa%of[AdjustedTotalAssets+RWAOperationalRisk].Returntofootnote29Footnote30Annex1containsadditionaldetailsaroundOSFI'sprocessfordesignatingCanadianinstitutionsasD-SIBs.Returntofootnote30Footnote31BCBSConsolidatedframeworkRBC40.1to40.6Returntofootnote31Footnote32SimilarcapitalconservationratiosapplywhereaD-SIBbreachesitsTier1capitalorTotalcapitalrequirements.IntheeventthataD-SIBsimultaneouslybreachesmorethanonecapitalrequirement(e.g.8%CET1,9.5%Tier1,11.5%TotalCapital)itmustapplythemostconstrainingcapitalconservationratio.Returntofootnote32Footnote33DetailsrelatedtotheOSFI'sDSBareincludedonOSFI'swebsite:https://www.osfi-bsif.gc.ca/Eng/fi-if/in-ai/Pages/dsb-bk.aspxReturntofootnote33Footnote34Establishedundersection18oftheOSFIAct,theFinancialInstitutionsSupervisoryCommitteeconsistsoftheSuperintendentofFinancialInstitutions,theCommissioneroftheFinancialConsumerAgencyofCanada,theGovernoroftheBankofCanada,theChiefExecutiveOfficeroftheCanadaDepositInsuranceCorporation,andtheDeputyMinisterofFinance.Returntofootnote34Footnote35GuidetoInterventionforFederallyRegulatedDeposit-TakingInstitutionsReturntofootnote35Footnote36Theconservationbufferisthesumofthe2.5%capitalconservationbufferplusanycountercyclicalbufferadd-onswhereapplicable.Returntofootnote36Footnote37Asanexample,wheretheDSBissetto2%ofRWA,D-SIBs'targetcapitalratioswouldbeatleast10%forCET1,11.5%forTier1and13.5%forTotalcapital.Thisreflectsaconservationbufferof2.5%andaD-SIBsurchargeof1.0%.Returntofootnote37Footnote38GuidetoInterventionforFederallyRegulatedDeposit-TakingInstitutionsReturntofootnote38Footnote39ForOSFI'sexpectationsrefertoGuidelineE-18:StressTestingandGuidelineE-19:InternalCapitalAdequacyAssessmentProcess(ICAAP).Returntofootnote39Footnote40Aframeworkfordealingwithdomesticsystemicallyimportantbanks(BCBS:October2012)Returntofootnote40Footnote41ACSShandlesallCanadiandollarpaymentsnotprocessedbytheLVTS.Returntofootnote41Footnote42CLSBankprovidesareal-timeglobalnetworkthatlinksanumberofnationalpaymentssystemstosettletheforeignexchangetransactionsofitsmemberbanksReturntofootnote42Footnote43BCBSConsolidatedframeworkRBC40.1to40.6andSCO40.1to50.20Returntofootnote43Footnote44DetailsrelatedtoG-SIB'sannualpublicdisclosurerequirementsareincludedinOSFI'sGlobalSystemicallyImportantBanks–PublicDisclosureRequirementsAdvisoryReturntofootnote44Footnote45OSFI'sSupervisoryFramework(OSFI:February2011)Returntofootnote45Footnote46ConsistentwiththeFinancialStabilityBoard'sKeyAttributesofEffectiveResolutionRegimesforSystemicallyImportantFinancialInstitutions.OSFIisresponsibleforleadingtheassessmentofrecoveryplans.TheCanadaDepositInsuranceCorporationisresponsibleforleadingtheassessmentofresolutionplans.Returntofootnote46Footnote47OSFI'sPillar3DisclosureGuidelineforD-SIBs:thisguidelineprovidesexpectationsforthedomesticimplementationofallthreephasesofthePillar3Framework.Returntofootnote47Footnote48EnhancingtheRiskDisclosuresofBanks,(FSB:October2012).Returntofootnote48 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