COVID-19: New Measures Announced in Respect of Basel Capital Framework

On April 4, 2020, the Basel Committee on Banking Supervision (Basel Committee) announced new measures aimed at alleviating the impact of COVID-19 on the global banking system. The Office of the Superintendent of Financial Institutions (OSFI), Canada’s prudential banking regulator, welcomed the measures announced by the international standard-setting body and is considering how best to implement them in Canada. OSFI will communicate its expectations later this week.
 
The Basel Committee announced the following measures:

• New technical clarifications provide guidance on the capital treatment of loans that are subject to government guarantees or payment deferrals offered in response to the COVID-19 outbreak. The Basel Committee notes that in determining whether a loan is past due or defaulting or is a nonperforming asset for credit risk weighting purposes, payment deferral periods relating to COVID-19 need not be counted towards days past due, and in considering whether a borrower is unlikely to pay credit obligations, the assessment should be based on whether the borrower is unlikely to be able to repay the rescheduled payments. A loan should also not be considered as subject to forbearance under the Basel capital framework when a borrower accepts the terms of a payment deferral or has access to other relief measures such as public guarantees. These are new clarifications that, if adopted in Canada, will supplement the relief measures announced by OSFI in late March. For more information, please see our March 2020 Blakes Bulletin: OSFI Announces Further Actions in Response to COVID-19.

• The Basel Committee stresses that expected credit loss (ECL) accounting frameworks are not designed to be applied mechanistically and that banks should use the flexibility inherent in these frameworks to take account of the mitigating effect of COVID-19 support measures. In this respect, the Basel Committee is amending its transitional arrangements for the regulatory capital treatment of ECL accounting, which is intended to provide member countries with greater flexibility in deciding whether and how to phase in the impact of ECL on regulatory capital.

• As part of additional measures, the implementation of the revised G-SIB framework is postponed to 2022, and the final two implementation phases of the framework for margin requirements for noncentrally cleared derivatives are deferred by one year.

For further information, please contact:
 
Paul Belanger                  416-863-4284
Vladimir Shatiryan          416-863-4154

or any other member of our Financial Services Regulatory group.

Please visit our COVID-19 Resource Centre to learn more about how COVID-19 may impact your business.