Basel IV and

proportionality initiatives
Upcoming changes to the Canadian capital
and liquidity framework

Introduction
Enhancements to risk-based capital requirements and minimum Q1-2020. Attention is now focused on the implementation of
liquidity and funding standards for Deposit-Taking Institutions final Basel III reforms, informally referred to as ‘Basel IV’, which
(DTIs) are two foundational aspects of post-financial crisis introduces extensive revisions to the calculation of Risk-Weighted
reforms introduced by Basel III. In Canada, initial Basel III reforms Assets (RWA) for Pillar 1 risks. OSFI’s proposed policy direction
dedicated to raising the quality and quantity of capital have and implementation timelines for Basel IV are included in OSFI’s
already been implemented. The domestic implementation of July 2018 discussion paper, Implementation of the final Basel III
Basel III liquidity and funding standards will be complete when reforms in Canada.
DTIs begin reporting the Net Stable Funding Ratio (NSFR) in

Figure 1: Summary of basel capital, leverage and liquidity requirements

Focus of CET1
Basel III: ratio
Raising the Capital LCR, NSFR Leverage ratio
quality and
quantity of
capital

Focus of RWA
Basel IV:
Revising
how risks are
calculated Risk positions

SA for Securitisation Operational SA for IRB for Market risk CVA risk Output
measuring risk credit risk credit risk (FRTB) floor
counterparty
credit risk

Source: Workshop Basel IV, KPMG International, 2018.

While the Basel framework was originally designed to apply to which obligates DTIs to achieve compliance with updated
large, internationally-active banks, domestic regulators including standards in short order.
OSFI have applied Basel standards to a wider set of banks
In this paper, we provide a consolidated overview of the
for pragmatic reasons. However, the complexity introduced
scope and timelines for the upcoming revisions to capital and
by Basel III/ IV has led regulators to now consider how the
liquidity requirements for DTIs and outline the extent to which
framework can be better tailored to smaller, less complex
proportionality considerations affect the scope of changes
banks. OSFI’s July 2019 discussion paper titled Advancing
affecting Small and Medium Sized Institutions (SMSBs). Foreign
Proportionality: Tailoring Capital and Liquidity Requirements for
Bank Branches (FBBs) are subject to different standards and
Small and Medium-Sized Deposit Taking Institutions presents
expectations with respect to capital and liquidity, and a brief outline
its proposals to tailor requirements for non-D-SIB banks.
of the current state and future changes is also provided. Finally,
OSFI’s timelines for implementing the changes related to
we conclude with a summary of KPMG’s perspective on key
Pillar 1 capital and liquidity requirements conclude in Q1-2022,
considerations and challenges for DTIs leading up to Q1-2022.
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2    Basel IV and proportionality initiatives

Overview of the current Canadian capital and liquidity framework

1. Current capital and liquidity requirements for SMSBs and D-SIBs
Capital requirements, leverage requirements and the output floor
The following table summarizes the minimum target levels for risk-based capital ratios for DTIs:

Table 1: SMSB and D-SIB Risk-based Capital Ratios

Common Equity Tier 1

(CET1) Tier 1 Total
Minimum Ratios 4.5% 6.0% 8.0%
Capital Conservation Buffer (CCB) 2.5% 2.5% 2.5%
Countercyclical Buffer (CCyB) Not activated Not activated Not activated
Minimum Target for SMSBs (including buffers) 7.0% 8.5% 10.5%
D-SIB Buffer 1.0% 1.0% 1.0%
Domestic Stability Buffer (DSB) 2.0% 2.0% 2.0%
Minimum Target for D-SIBs (including buffers) 10.0% 11.5% 13.5%

Sources:
Capital Adequacy Requirements Guideline, OSFI, 2019
Industry Notice on Domestic Stability Buffer, OSFI, June 2019

DTIs are also expected to maintain a leverage ratio (LR) of at DTIs that have received OSFI’s approval to use advanced
least 3%. Disclosure requirements for capital and the leverage approaches to determine credit or operational risk capital
ratio can be found in OSFI’s Capital Disclosure Requirements requirements are required to calculate a capital floor which limits
and D-12 Leverage Ratio Disclosure Requirements. the extent that RWAs can be lowered relative to standardized
approaches. Prior to Q2-2018, Canadian DTIs using internal
In addition to the above changes that raise the quality and
models to calculate a Basel I capital floor as per OSFI’s now
quantity of capital, the implementation of updated Basel IV
expired A-3 Guideline. Effective Q2-2018, Canadian DTIs using
standards related to the calculation of RWAs has also begun.
internal models, or Internal Models Approved Institutions
Revisions to the securitization framework, the capitalization of
(IMAIs), switched over to revised capital floor based on Basel II
central counterparty exposures (for inclusion in the calculation
standardized approaches which will stay in place until Q4-2021
of both risk-based capital and leverage requirements), and the
using a scaling factor of 72.5%.
standardized approach for counterparty credit risk (SA-CCR)
were implemented in Q1-2019. Outstanding revisions to RWA
calculations will be implemented by Q1-2022.
Figure 2: Interim domestic Basel II output floor

Modelled
requirement

Floor
requirement

Modelled RWA 75% x Floor RWA

Less 12.5 x deductions for allowances included in capital
Plus 12.5 x allowance for shortfall deductions

Modelled RWA = Total RWA using OSFI-approved advanced approaches plus partial-use portfolios treated under non-modelled approaches
Floor RWA = Credit RWA, Market RWA, Other Credit RWA and CVA RWA using standardized approaches (with some advanced inputs for CVA and
market risk depending on a DTI’s approval status).

Source: Capital Adequacy Requirements Guideline, Chapter 1.9.1., OSFI 2019

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 Basel IV and proportionality initiatives    3

Liquidity requirements
As stated in the Liquidity Adequacy Requirements (LAR), OSFI’s
assessment of an institution’s liquidity adequacy is informed by
its minimum liquidity and funding standards, additional liquidity
metrics and supervisory standards. All DTIs are currently required
to maintain a Liquidity Coverage Ratio (LCR) of no lower than
100% and D-SIBs must provide public disclosures in accordance
with OSFI’s D-11 Guideline. DTIs are also required to report to
OSFI the Net Cumulative Cash Flow (NCCF) metric for multiple
time horizons up to one year as well as a suite of liquidity and
intraday liquidity monitoring tools. Although NCCF and other
monitoring tools do not have defined minimum thresholds, OSFI
reserves the right to set regulatory requirements as needed.

Figure 3: Factors in the supervisory assessment of liquidity adequacy

Minimum liquidity and Additional liquidity metrics Supervisory assessments

funding standards
NCCF Monitoring tools BCBS 144
OSFI B-6 Principles for

LCR NSFR Liquidity principles

sound liquidity risk
Effective Q1-2020 management and
Intraday monitoring tools supervision

Source: Liquidity Adequacy Requirements Guideline, OSFI, 2019

2. Current capital and liquidity requirements for foreign bank branches (FBBs)
FBBs are subject to different capital and liquidity requirements Figure 4: FBBD maintenance requirements for full-service
than D-SIBs and SMSBs. Instead of risk-based capital branches
requirements, FBBs hold a foreign bank branch deposit (FBBD)
requirement that is met by unencumbered assets deposited Supervisory concerns
with an approved financial institution in Canada. For a lending (if required by OSFI)
branch, the FBBD is $100,000, whereas for a full-service branch
there is an initial FBBD requirement of $5 million with additional Fluctuation in liabilities
maintenance requirements to account for fluctuations in liabilities
and supervisory concerns.
With respect to liquidity, OSFI’s draft B-6 guideline indicates that Base requirement
FBBs may require quantitative reporting pertaining to the liquidity
of the branch in Canada and its degree of ongoing reliance on its
head office. Source: Draft Guideline A-10, OSFI, 2019

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4    Basel IV and proportionality initiatives

Overview of the upcoming changes to the Canadian

capital and liquidity framework
In this section, we begin by reviewing the upcoming changes to in Canada. Next, we explore OSFI’s proposals for how the
the Canadian capital and liquidity framework for D-SIBs, which tailoring of base D-SIB requirements helps to better fit the unique
are directly transcribed from Basel, with modifications to take characteristics of SMSBs. This section concludes with a brief
into account the unique aspects of domestic implementation synopsis of changes to FBB branch capital requirements.

1. Domestic systemically important banks (D-SIBs)

Capital requirements, output floor and leverage (SA), and modifications to the Internal Ratings Based (IRB) –
requirements the removal of the IRB eligibility of some asset classes and
As mentioned in Section II, the implementation of updated the introduction of parameter floors. The Basel Committee on
standards related to Basel IV is currently underway. This section Banking Supervision (BCBS) has also indicated that the 1.06
provides a summary of the changes for which implementation scaling factor that currently applies to credit RWAs no longer
is not complete and outlines the details of OSFI’s proposals for applies in light of revisions to the risk-weighted framework and
domestic implementation. the revised output floor1. KPMG’s Basel IV: The Way Ahead
series includes two articles that explore the changes to the
Credit risk SA and IRB approaches in further detail.

Changes to the credit risk standards in Basel IV introduce a OSFI’s July 2018 discussion paper proposes additional changes
revised, more risk sensitive and granular Standardized Approach intended to better reflect Canadian market characteristics:

Table 2: Proposed changes to the domestic credit risk capital framework – Applicability to SA and IRB approaches

Residential mortgages Credit card exposures Retail SBE /

Corporate SME
Maintaining a Separate risk ” Risk weight for “ CCF for “ PD floor for Apply Corporate
10% LGD Floor weight function transactors and unconditionally non-transactors SME risk
for ‘property “ Risk weight for cancellable weights to both
Impacted
generated cash non-transactors commitments Retail SBE and
approach
flow dependent’ Corporate SME
residential categories
mortgages

Revised
Standardized × × ×
Approach (SA)

Modifications
to the IRB × × × ×
Approach

Source: Domestic Implementation of the Final Basel III reforms, OSFI, July 16, 2018.

Operational risk
Basel IV reforms remove the Advanced Measurement Approach capital is determined by using an income statement based proxy
(AMA) from the regulatory framework and streamlines the known as the Business Indicator Component (BIC) and applying
operational risk framework by replacing the existing standardized a scaling factor known as the Internal Loss Multiplier (ILM) which
approaches (The Basic Indicator Approach and the Standardized accounts for a bank’s historical loss levels based on internal data.
Approach) with a single, approach named the Standardized KPMG’s Basel IV: The Way Ahead series explains the mechanics
Measurement Approach (SMA). The SMA for operational risk of the SMA approach in further detail.

1
Footnote 3, Page 3, Basel III: Finalising post-crisis reforms. https://www.bis.org/bcbs/publ/d424.pdf

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 Basel IV and proportionality initiatives    5

OSFI’s July 2018 discussion paper proposes exercising the 2. Allow smaller FIs (with a business indicator, or BI < C$1.25B)
national discretion permitted by the BCBS in relation to the to use historical losses if they are able to meet minimum
inclusion and exclusion of internal loss data in the following ways: requirements with respect to loss data collection. This would
make smaller banks’ operational risk capital requirements
1. Establish a minimum threshold of C$25,000 for including loss
sensitive to their internal loss experience.
events in data collection and average annual loss calculations
used in calculating the ILM. OSFI is providing a transition period for DTIs currently using AMA
for operational risk capital (‘AMA DTIs’) as illustrated below:
Figure 5: Transition period for Basel III SMA implementation

2019 2020 2022

Continue using AMA capital Reporting using the current standardized Implement SMA for
reporting for the remainder of approach (TSA) for fiscal 2020 operational risk capital
fiscal 2019 reporting. Removal of requirement for using business
environment and internal control factors (BEICF)

After AMA is de-commissioned, OSFI expects AMA DTIs to The revised standards for CVA Risk consist of two new options:
continue conducting internal and external loss data and scenario the Basic Approach (BA-CVA) and a new Standardized Approach
analysis as part of their internal risk management practices. (SA-CVA). KPMG’s Basel IV: The Way Ahead series includes an
article that explains the mechanics of the BA-CVA and SA-CVA
Market risk and CVA risk approaches in further detail. In its July 2018 discussion paper, OSFI
The new Fundamental Review of the Trading Book (FRTB) indicated that it intends to implement the changes for the updated
framework introduces essential structural changes to all CVA risk framework without any modifications in Q1-2022.
processes and calculations involved in determining market risk
capital requirements. KPMG’s Basel IV: The Way Ahead series Output floor
includes an article that explains the mechanics of the FRTB in Basel reforms introduce an updated output floor based on Basel
further detail. III standardized approaches. Basel will phase in the capital floor
from January 1, 2022 to January 1, 2027 by increasing the scaling
In a July 2017 industry letter, OSFI communicated its commitment
factor from 50% to 72.5% over a five year period. However, OSFI
to implementing the revised market risk capital standards by
has proposed implementing the output floor at a level of 72.5%
Q1-2022, however uncertainty remains within the marketplace in
effective Q1-2022, as it believes the transition period on the
relation of the scope and timing of implementation plans for the
output floor is not needed.
internal models approach (IMA).

Figure 6: Basel IV Capital Floor

Post floor RWAs = Max (pre-floor RWAs, 72.5% x standardised RWAs)

Pre-floor RWA Standardized RWAs Post floor RWA

RWA using banks Hypothetical Maximum of pre-floor
approved methods standardised RWA RWA and 72.5% of the
standardised RWA
Operational risk SA 2 72.5% of SA
Market risk SA
1 Additional RWA due 3 = 2-1
Operational risk SA to floor
Credit risk SA 4.5% of
Market risk IMA (roll out) RWAs as
Credit risk SA CET1 capital
(roll out) CVA SA
to meet
CVA SA Step 1 RWA pillar 1
CCR SA
CCR IMM
rquirements
if SA
Credit risk SA
Credit risk IRB

Source: Workshop Basel IV, KPMG International, 2018.

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6    Basel IV and proportionality initiatives

Leverage ratio the new SA for counterparty credit risk, but additional technical
Basel III reforms to the leverage ratio (LR) include a new LR refinements to the treatment of on-balance sheet exposures,
buffer for G-SIBs and technical refinements to the exposure securities financing transactions (SFTs) and off-balance sheet
measure in the denominator of the LR. In its July 2018 discussion items will be considered as part of OSFI’s consultation process
paper, OSFI proposes conservatively treating D-SIBs as first for annual changes to the LR framework prior to Q1-2022.
bucket G-SIBs and applying a LR buffer of 50 bps to D-SIBs (i.e.
50% of the D-SIB capital buffer of 1%). This raises the minimum Liquidity
LR requirement for D-SIBs to 3.5% starting in Q1-2022. The LR Net stable funding ratio
exposure measure has already been updated in Q1-2019 to reflect
Effective Q1-2020, OSFI will incorporate the NSFR into the
Figure 7: D-SIB Leverage requirements Liquidity Adequacy Requirements (LAR). NSFR Disclosure
requirements become effective in January 2021. The NSFR is
3.5% a long-term structural liquidity metric defined as the ratio of
Leverage ratio buffer
Available Stable Funding (ASF) to Required Stable Funding (RSF).
3.0% Based on KPMG’s interpretation of OSFI’s discussion papers
Leverage requirement on Final Basel III reforms and Proportionality, OSFI proposes
requiring D-SIBs and IRB approved SMSBs to calculate the NSFR
and maintain a level of at least 100% on an ongoing basis.
Source: Leverage Requirements Guideline, OSFI, 2019.

2. Small and medium sized banks (SMSBs)

According to OSFI’s July 2019 Discussion Paper, proportionality segmenting SMSBs using the following qualitative and
initiatives will follow a phased approach. Phase 1 will focus on quantitative criteria:
the development and implementation of a final set of rules that
1. IRB approval status: IRB-approved DTIs demonstrate a high
apply to Pillar 1 capital and liquidity, while Phase 2 will address
level of sophistication with respect to their use of ratings,
Pillar 2 and 3.
corporate governance and internal controls.
–– Phase 1: Rules will be finalized by December 2020 and
2. Size of on-balance sheet assets: Used as a proxy for a
implemented effective Q1-2022.
DTI’s size.
–– Phase 2: Consultations will begin mid-2020 and finalization
3. Size of Assets Under Management (AUM) or Assets
timelines are TBD.
Under Administration (AUA): Used as an additional factor
to segment DTIs for SMSBs with relatively small amounts of
Segmentation approach – dividing SMSBs into four
on-balance sheet assets.
categories
4. Supervisory judgement: Retained as a final category in
The SMSB category is comprised of domestic banks and
assessing the nature of a DTI’s business.
credit unions, foreign bank subsidiaries, and trust and loan
companies that differ significantly with respect to their nature, Based on these criteria, OSFI has proposed the segmentation of
size, complexity and business activities. OSFI has proposed SMSBs into four categories, as seen in Table 3:

Table 3: Proposed segmentation scheme for SMSBs

Category 1 2 3 4
Criteria Approved to use IRB SMSBs > $10B in SMSBs with Assets SMSBs with ≤ $0.5B in Assets and
approach for credit risk assets of $0.5B to $10B or ≤ $20B in AUA/AUM
>$20B in AUA/AUM
Characteristics Large, diverse SMSBs Large SMSBs (with Smaller SMSBs (with Smallest,
varying complexity less complexity and least complex institutions
and diversification) diversification)

Source: Advancing Proportionality: Tailoring Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions, OSFI, 2019.

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 Basel IV and proportionality initiatives    7

Tailoring capital requirements, output floor and leverage requirements for SMSBs

Credit risk Operational risk Output floor

Category 1 SMSBs with IRB approval will SMSBs will continue to use their The output floor will only apply to SMSBs
be subject to the revisions to the credit current approach (either the BIA or TSA) that are also Internal Models Approved
risk capital framework as described in the for operational risk until Q1-2021. OSFI Institutions (IMAIs).
D-SIB section above: the removal of IRB is considering the following approach SMSBs that do not use advanced
eligibility of some asset classes, newly for tailoring SMSB operational risk approaches to determine Pillar 1 capital
introduced parameter floors, and changes requirements: requirements do not have to take the
intended to reflect Canadian market –– Category 1 and 2 SMSBs: Implement output floor into consideration.
characteristics. OSFI proposes tailoring the SMA as outlined in the final Basel
requirements to reduce complexity and III reforms.
better capture risks for Category 2 – 4 Leverage requirements
–– Category 3 SMSBs: Continue to
SMSBs in the following way:
use a simple approach to calculate Under OSFI’s proposal, Category 4
–– Category 2 SMSBs: Fully implement
operational risk capital (e.g. a simple SMSBs will no longer be required to
the final Basel III SA with the option
flat rate charge based on the current calculate risk-based capital ratios. The
of using a simplified standardized
BIA or another measure such as leverage ratio would be used to assess
approach (SSA).
assets, AUA/AUM). capital adequacy against an exposure
–– Category 3 SMSBs: Use a SSA with measure that does not require assets to
–– Category 4 SMSBs: Exempt from
the option of fully implementing the be risk-weighted.
all risk-based capital requirements for
final Basel III standardized approach.
Pillar 1 risks. They would instead be held to a higher
–– Category 4 SMSBs: Exempt from minimum leverage ratio. Instead of the
all risk-based capital requirements for current 3% minimum, a possible range of
Pillar 1 risks. 8%-12% was proposed.

Liquidity requirements
SMSBs are currently required by OSFI to calculate the Liquidity the liquidity risks that they face. They will not be required to
Coverage Ratio (LCR), Net Cumulative Cash Flow (NCCF), and calculate the NCCF and NSFR.
a suite of assessment tools for assessing liquidity adequacy.
–– Category 4 SMSBs will only be required to calculate a series
OSFI’s July 2019 Discussion Paper proposes tailoring liquidity
of simplified liquidity metrics. They will not be required to
requirements for SMSBs in the following way:
calculate the LCR, NCCF, and NSFR.
–– Category 1 SMSBs will have similar reporting requirements
OSFI has indicated that they are looking into possible revisions
as D-SIBs. In addition to calculating the LCR and the NCCF,
to the NCCF with the objective of increasing risk capture and
Category 1 SMSBs will be required to calculate the NSFR.
modifying cash flow assumptions. The simplified liquidity metrics
–– Category 2 SMSBs will continue calculating both the LCR mentioned above have not been finalized, but may take the form
and NCCF. However, they will not be required to calculate of a minimum liquid asset holding requirement and a simplified
the NSFR. cash flow metric depending on the nature of the SMSBs
activities.
–– Category 3 SMSBs will be required to calculate the LCR
and a series of simplified liquidity metrics that better reflect

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8    Basel IV and proportionality initiatives

Table 4: Summary of SMSB proportionality proposals for Pillar 1 capital and liquidity

Category
1 2 3 4

Criteria Approved to use SMSBs with Assets SMSBs with ≤ $0.5B in

SMSBs > $10B
IRB approach for of $0.5B to $10B or Assets and ≤ $20B in
in assets
credit risk >$20B in AUA/AUM AUA/AUM

Risk-based Credit Risk IRB approach SA Simplified SA N/A

Capital Operational
Capital Ratios SMA SMA Flat add-on N/A
Risk

Leverage Ratio (LR) LR LR LR Increased LR requirement

LCR LCR LCR LCR N/A

Liquidity NCCF NCCF NCCF Simplified Metrics* Simplified Metrics*

NSFR NSFR N/A N/A N/A

Source: Advancing Proportionality: Tailoring Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions, OSFI, 2019.

3. Foreign bank branches (FBBs)

On June 18, 2019, OSFI published its proposed changes to Guideline A-10 that are scheduled to be
implemented in Q1 2020. Revisions include updates and simplifications to reflect current practices and
changes to the deposit ratio calculation.

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 Basel IV and proportionality initiatives    9

Key considerations and challenges

There are four key issues faced by banks globally: higher Ahead series elaborates on these issues in further detail. In
capital requirements, upgrades to data, systems and reporting, addition to the global concerns listed above, we provide KPMG’s
managing increased RWAs (by adjusting their product mix, finding perspective on the following considerations and challenges
cost efficiencies, issuing new capital or reducing RWA) and related to the domestic implementation of Basel IV: reforms
consideration of the broader context of other regulatory reforms. and proportionality initiatives.
Piecing the Jigsaw Together from KPMG’s Basel IV: The Way

1. Implementation of operational risk reforms

DTIs’ implementation of SMA for operational risk should take into –– SMSBs currently using the Basic Indicator Approach
account the following considerations: (BIA) or TSA face a degree of uncertainty regarding what to
expect in relation to their future ORC requirements. OSFI has
–– Before migrating to the SMA in fiscal 2022, DTIs currently
proposed requiring Category 1 and 2 SMSBs to use the SMA
using the AMA must first transition to the TSA approach for
and having Category 3 SMSBs calculate a to-be-determined
operational risk capital in fiscal 2020. The resulting changes
flat rate charge for ORC. Category 4 SMSBs are exempt from
in the derivation of the ORC charge requires banks to compile
risk-based capital requirements.
gross income data and quickly address any issues that may
arise as a result of data requirements associated with the –– AMA DTIs and Category 1 and 2 SMSBs should consider
TSA (e.g. three years of gross income data by Basel-defined investigating the potential scope of SMA implementation
business line, proxy development to address missing data, and efforts, as calculating the ILM vastly increases the scope
incorporating gross income data from recent acquisitions). of a DTI’s implementation as they must meet minimum
standards for loss data identification, collection, and treatment
documented in sections 5 and 6 of BCBS D424.

2. Implications of proportionality for SMSBs with plans for growth and

applying for IRB approval
After the implementation of Basel IV: and proportionality related the greatest, as migration to Category 3 results in the re-
reforms in Q1-2022, SMSBs will be held to capital and liquidity introduction of risk-based capital requirements and elevated
requirements that are tailored to their size and complexity. liquidity requirements (i.e. being subject to LCR standards).
However, SMSBs with plans for growth or applying for IRB
–– SMSBs interested in applying for IRB approval should
approval will have to take into account the broader implications
prepare for the impact of OSFI’s proportionality proposals in
on its capital and liquidity requirements.
their work plans. Under the proposed SMSB categorization
–– Under OSFI’s proposed proportionality initiatives, Category 3 scheme, a newly approved IRB SMSB would be re-classified
and Category 4 SMSBs are subject to less complex Pillar 1 as a Category 1 SMSB and this would trigger the requirement
capital and liquidity requirements. However, any future plans to report and meet minimum standards for the NSFR. By
for business growth that result in an increase in on-balance electing to use an advanced approach for credit risk capital,
sheet assets, AUA, or AUM beyond the thresholds must a SMSB would be faced with meeting increased liquidity
take into consideration the impact of elevated capital and adequacy requirements.
liquidity requirements. The impact on Category 4 SMSBs is

3. SMSBs with exposures to CVA risk

SMSBs with non-centrally cleared derivatives will have capital
requirements for both counterparty credit risk and CVA risk. The
same rules for both D-SIBs and SMSBs apply, and therefore CVA
risk is not addressed in OSFI’s discussion paper on proportionality.
However, given that SMSBs typically have smaller derivative
portfolios, it is worthwhile to note that the general provisions of
the minimum capital requirements for CVA risk (see Page 109,
Paragraph 7 of BCBS 424) permit DTIs below a materiality
threshold of €100B have the option to be able to determine CVA
capital with CCR capital (i.e. CVA capital = 100% of CCR capital)
or through either of the prescribed CVA approaches (BA-CVA or
SA-CVA with supervisory approval).

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10    Basel IV and proportionality initiatives

4. Areas of SMSB proportionality initiatives requiring further elaboration

OSFI’s proposals for tailoring SMSB’s capital and liquidity a simple flat charge based on the existing Basic Indicator
requirements do not provide specific details with respect to the Approach or another measure such as AUM or AUA.
simplified SA for credit risk, and simplified liquidity metrics:
–– With respect to liquidity requirements, little has been said
–– Under OSFI’s proposed approach for credit risk, Category 2 about the exact nature of the simplified liquidity metrics for
and 3 SMSBs have the option of using either the SA or the Category 3 and 4 SMSBs, except that they could take the
SSA for credit risk. The exact format of the SSA has yet to be form of a minimum liquid asset holding requirement or a
determined however we are aware of simplified approaches simplified cash flow metric.
for credit risk that have been implemented for smaller banks in
–– Category 4 SMSBs would be held to higher minimum
both the US (based on domestic standards), Hong Kong (based
standards for the leverage ratio, in the range of about
on Basel I), and Switzerland (for mutual fund exposures).
8% to 12%.
–– According to OSFI’s proposal, Category 3 SMSBs would
SMSBs can get involved in the consultation process to provide
continue to use a simple approach for operational risk capital,
feedback and express opinions on the format of these aspects
of the proposed proportionality related changes.

5. Model governance implications for changes to IRB eligibility

IRB approved DTIs need to consider the model governance procedures and in compliance with Section 5.6 of OSFI E-23
implications resulting from the removal of Banks and other FIs, Guideline. DTIs should notify relevant stakeholders that
Large/mid-sized corporates and Equities from the Advanced IRB models are being decommissioned and established standards
(AIRB) approach in Q1-2022. regarding the retention of model information and model
inventory documentation should be followed.
–– Banks with separate parameter models for regulatory
capital (RC) and economic capital (EC) purposes will need –– Banks that use the same parameter models for RC and EC
to decommission their RC parameter models for the above will have to update their model inventories to reflect the
portfolios in accordance with documented policies and change in model usage for EC purposes only.

Conclusion
The Canadian implementation of the final Basel III reforms and optimization initiatives on the institution’s required
(Basel IV) has already begun and it is scheduled to be implementation efforts. KPMG can provide support across the
completed by Q1-2022. For individual DTIs, the nature and end-to-end implementation efforts from rules interpretation, data
scope of Basel IV reforms will differ for D-SIBs and the and systems, model development to independent review, and
different categories of SMSBs. regulatory reporting.
OSFI’s proportionality initiatives for SMSB’s Pillar 1 capital KPMG in Canada’s Financial Risk Management practice
and liquidity requirements will be finalized in December leverages risk and regulatory specialists to provide the latest
2020 and they will need to be ready to implement these insights regarding the issues that DTI’s face, and the customers
initiatives as part of their Basel IV implementation in Q1-2022. they serve. Our dedicated teams have developed leading and
Their implementation efforts will also be shaped by public innovative strategies and solutions which are tailored to individual
consultations regarding Pillar 2 and Pillar 3 considerations that client needs. Utilizing these insights and solutions, KPMG
are scheduled to begin in mid-2020. professionals use their deep Financial Services experience to
help DTI’s achieve and maintain regulatory compliance in an
KPMG can help DTIs implement, interpret and perform gap
optimal manner.
analyses for the Basel IV regulations and identify synergies

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 Basel IV and proportionality initiatives    11

Glossary
AIRB Advanced Internal Ratings Based (Approach for Credit Risk)
AMA Advanced Measurement Approach (for Operational Risk)
ASF Available Stable Funding
AUA Assets under Administration
AUM Assets under Management
BA-CVA Basic Approach for CVA Capital
BCBS Basel Committee for Banking Supervision
BI Business Indicator
BIC Business Indicator Component
CCB Capital Conservation Buffer
CCF Credit Conversion Factor
CCR Counterparty Credit Risk
CCyB Countercyclical Buffer
CET1 Common Equity Tier 1 capital
CVA Credit Valuation Adjustment
D-SIB Domestic Systemically Important Bank
DTI Deposit-Taking Institution
G-SIB Global Systemically Important Bank
ILM Internal Loss Multiplier
IMAI Internal Models Approved Institution
IMM Internal Model Method (for Counterparty Credit Risk)
IRB Internal Ratings Based Approach – Credit Risk
FBB Foreign Bank Branch
FBBD Foreign Bank Branch Deposit
FRTB Fundamental Review of the Trading Book
LAR Liquidity Adequacy Requirements
LCR Liquidity Coverage Ratio
LGD Loss Given Default
LR Leverage Ratio
NCCF Net Cumulative Cash Flow
NSFR Net Stable Funding Ratio
OSFI Office of the Superintendent of Financial Institutions
RSF Required Stable Funding
RWA Risk-Weighted Assets
SA Standardized Approach
SA-CVA Standardized Approach for CVA Risk
SBE Small Business Entities
SFT Securities Financing Transaction
SMA Standardized Measurement Approach
SME Small and Medium Sized Entities
SMSB Small and Medium Sized Banks

© 2019 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Contact us
Craig Davis Diana Lowe
Partner, Risk Consulting Partner, Risk Consulting
416-777-8671 416-777-3838
craigdavis2@kpmg.ca kdlowe@kpmg.ca

Jason Au Corina Deaconu

Director, Risk Consulting Executive Director, Risk Consulting
416-777-3037 647-777-5254
jasonau@kpmg.ca cdeaconu@kpmg.ca

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