OSFI has issued a draft Leverage Requirements Guideline (the Draft Guideline) based on the Basel Committee on Banking Supervision's Basel III leverage ratio framework and disclosure requirements (which was released in January 2014). The leverage ratio is designed to provide an overall measure of the adequacy of an institution's capital and complements the risk-based capital ratio. The leverage ratio will replace the current Assets to Capital Multiple requirement, which has been in effect since the 1980s. The new leverage requirements will apply to all banks, federally regulated trust or loan companies, cooperative retail associations and bank holding companies starting in January 2015.
Comments on the Draft Guideline are to be provided by September 12, 2014.
Calculation of leverage requirements
Under the Draft Guideline, the leverage ratio is defined as the "capital measure" divided by the "exposure measure", with the ratio expressed as a percentage. Starting in Q1 2015, institutions will be expected to maintain a leverage ratio of at least 3% at all times.
The capital measure for the leverage ratio is the all-in Tier 1 capital of the institution under the risk-based capital framework. An institution's total exposure measure is the sum of: (a) on-balance sheet exposures; (b) derivative exposures; (c) securities financing transaction exposures; and (d) off-balance sheet items. The Draft Guideline sets out how each of these four exposure types is to be calculated. The leverage ratio differs from the Assets to Capital Multiple requirement in that the leverage ratio includes more off-balance-sheet exposures and a uses a more stringent definition of capital (Tier 1 vs. Total Capital).
Authorized leverage ratio requirements
The Draft Guideline states that the Superintendent will prescribe authorized leverage ratio requirements for individual institutions. The Draft Guideline notes that an institution's authorized leverage ratio may be increased as part of OSFI intervention strategy. The Draft Guideline also contemplates an institution being able to apply for a decrease in its authorized leverage ratio.
The Draft Guideline lists the following factors that OSFI will take into account when setting authorized leverage ratios and when assessing whether an increase or a decrease in an institution's authorized leverage ratio is appropriate:
- the potential impact of the change on the institution's risk-based capital ratios compared to internal targets and OSFI targets;
- the effectiveness of operational management and oversight functions;
- the adequacy of capital and liquidity management processes and procedures;
- the institution's intervention history;
- the institution's risk profile and business lines; and
- the institution's strategic and business plans.