The Office of the Superintendent of Financial Institutions has issued revised capital adequacy guidelines to reflect the new international capital regime for banks.

In June, the Basel Committee on Banking Supervision published the new Basel framework, which retains key elements of the 1988 Basel Accord, but also introduces some new elements. It added Internal Ratings Based approaches to the calculation of the capital charge for credit risk, as well as a new capital charge for operational risk. Because the new Basel framework represents a significant advancement from the 1988 Basel Accord, OSFI decided to revise its capital adequacy guideline as well.

The regulator notes that it continues to work on implementing Pillar 2 (supervisory reviews) and Pillar 3 (market discipline). OSFI’s policy statement on Pillar 2 will be incorporated in a subsequent revision to CAR guidelines. Pillar 3 requirements will be addressed in revisions to guidelines setting out annual disclosure requirements.

OSFI plans to issue a working draft of CAR guidelines for comment in March 2006. The working draft will: reference implementation notes on minimum technical requirements for the IRB approach; include additional OSFI text boxes interpreting the standardized approach to operational risk as requested by the industry; and include the final Basel version of current proposals for trading book activities, counter-party credit-risk measurement and treatment of double default.

Institutions are invited to provide comments regarding the draft guidelines by September 30.

OSFI says it considered several approaches to the revision before deciding on a hybrid approach that combines new Basel framework text with relevant text of the existing OSFI capital adequacy requirement guideline. This approach allows OSFI to retain existing CAR guideline text where there is no material change, retain the new Basel framework’s numbering of paragraphs for easy cross reference to the Basel document, implement items of national discretion where appropriate, and issue a comprehensive capital guideline that is relatively easy to use.

http://www.osfi-bsif.gc.ca/osfi/index_e.aspx?ArticleID=849