OSFI to Replace Canada Leverage Rules With Basel III

Canada’s banking regulator is adopting the international rule that governs the ratio of capital to assets that domestic banks must hold, foregoing its own decades-old regulation.

The Office of the Superintendent of Financial Institutions will issue guidelines for the Basel III leverage standard later this year, Mark Zelmer, OSFI’s assistant superintendent of the regulation sector, said today at a conference in Toronto.

The current rule, known as the asset-capital multiple, or ACM, has been enforced since the 1980s. The new Basel III rule differs from the ACM because it includes exposure to more off-balance-sheet assets and defines capital more narrowly, Zelmer said.

Leverage ratios are designed to curb banks’ reliance on debt by setting a minimum standard for how much capital they must hold as a percentage of all assets on their books.

Canadian banks “will be expected to have Basel III leverage ratios that exceed 3 percent,” Zelmer said in written remarks. “OSFI will continue to set more stringent requirements on an institution-by-institution basis as circumstances warrant.”

OSFI’s declaration follows the Basel Committee on Banking Supervision’s Jan. 12 announcement that diluted its proposed debt limit. A quarter of large global lenders would have failed to meet a June version of the limit had it been in force at the end of 2012, according to data published by the Basel-based committee in September, which is in charge of writing rules to avoid another global credit squeeze.

The Basel III rules require banks to begin publicly disclosing their leverage ratios in early 2015, and Zelmer said Canadian banks should have no difficulty doing so. Zelmer also said OSFI isn’t following the U.S. in considering higher leverage ratios because it wants the flexibility to set more stringent requirements for some banks as there are “fundamental differences” between Canadian banks and their peers abroad.

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