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Canadian banks – at present do not have a fixed capital ratio requirement. What they have is a mixed bag of guidelines imposed by OSFI. Since the last balance sheet meltdown, various BASEL committees were set up and they came up with ideas to regulate financial institutions more and more. (My thought – I wish BASEL talked a bit about how to regulate banks mortgage representatives too, alas, it did not.)

Over the years, OSFI circulated its guideline about “Capital Adequacy Requirements” (CAR) and also in the beginning of this year it re-explained what can be done and what cannot be done. It is trying to introduce the strict capital ratio requirement on the banks with the help of an internationally accepted approach. Its move towards “International Financial Reporting Standards” (IFRS) and the introduction BASEL standards indicates that intent.

OSFI has been reviewing a very wide part of the financial world now. It is defining how mortgage lending should be done and also defining how the banks should lend.

Banks try to boost their capital position by striking off as many loans as they can – from their balance sheet. This reduces their loan amount on paper (more complicated than just that) and they gain access to more funds.

OSFI is trying to make sure that no one is overdoing this part.

Julie Dickson, OSFI Superintendent, said in the Bloomberg Canada Economic Summit

We have been reviewing the models used by banks to calculate capital charges for the part of the mortgage portfolio that is not insured, and generally believe that the models are producing reasonable results.

As usual, banks have many questions. This time once again OSFI sent out an explanation on the CAR – what can be removed from the balance sheet and what to remain? In its Capital Ruling – it defined the issue – that is being addressed as –

Whether the balance sheet exposure of a deposit-taking institution (DTI) has been deemed to be reduced to a sufficient degree such that insured mortgages that have been pooled and sold as National Housing Act Mortgage-backed Securities (NHA MBS or NHA MBS Program) and subsequently derecognized under IFRS can be excluded from the assets-to-capital multiple (ACM) calculation.

Assets-To-Capital Multiple:

Any bank has to have its Capital Ratios under close watch. There are three types of Capital Ratios. Tier 1 Capital ratio – in simple words – is the ratio between the “Core Equity” capital vs “Risk Weighted Assets”.

Apart from BASEL Capital Ratio requirements “Asset to Capital Ratio” is another requirement imposed by OSFI. According to its guideline

The assets to capital multiple is calculated by dividing the institution’s total assets, including specified off-balance sheet items, by the sum of its adjusted net tier 1 capital and adjusted tier 2 capital.

OSFI has a maximum cap on “Assets To Capital Multiple”. It cannot be more than 23. Therefore banks have an incentive to get rid of some assets from the class so they still have more access to funds for new loans – without crossing the regulatory limit.

OSFI Conclusion:

OSFI finally said that the banks can remove those assets that are backed by NHA-MBS.

OSFI concluded that these mortgages underlying the NHA MBS can be excluded from the numerator of the ACM calculation, based on the details and considerations presented herein, provided the DTI has obtained written confirmation from CMHC.

OSFI clearly said that it does not intend to constraint liquidity for the deposit taking institutions. It also expects the banks to conform to the B-6 (Liquidity Guideline) Guideline by OSFI.

No Change in Your Rates:

Borrowers would not see any changes in their mortgage rate as this ruling will have no effect on the current capital situations of the lenders.