Canadian banking outlook 2014

Changes to regulatory capital requirements and disclosure expectations

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The implementation of the Basel III capital requirements was a significant regulatory milestone when it became effective for Canadian banks in the first quarter of fiscal 2013. The Basel III requirements were designed to strengthen global capital rules with the goal of promoting a more resilient global banking sector.

Canada is currently one of 11 jurisdictions to have finalized and implemented the Basel III regulations. Notably, there have been delays in the United States and several European Union countries that have created temporary differences in the calculation methodology of reported capital ratios.

In addition, the Basel Committee on Banking Supervision (BCBS) recently raised concerns regarding undesirable variations in banks’ estimates of risk-weighted assets (RWAs). While some variation would be expected, there is concern that excessive variations may reduce the comparability of externally reported capital ratios and compromise the goals of Basel III implementation. The sources of variation are currently being analyzed and potential responses may include additional disclosures and restrictions on allowable modelling choices.

It is important that any differences in methodology across jurisdictions and reporting entities are clearly disclosed and understood. While the six major Canadian banks have a history of strong disclosure practices, they are expected to adopt the recommendations of the Financial Stability Board’s enhanced disclosure task force along with their international peers. This would include potential enhancements to RWA disclosures to help users understand how the models are influenced by data inputs, modelling assumptions, mathematical formulations, and manual overrides. This should have a positive impact on the comparability of reported capital ratios between banks and across jurisdictions. For the other Canadian deposit-taking institutions, the recommendations of the Financial Stability Board’s enhanced disclosure task force represent industry leading practices to be considered, which will further enhance comparability within the industry. The current diversity in bank and supervisory practices is further discussed in the BCBS’s first report on the regulatory consistency of RWAs for credit risk in the banking book released on 5 July 2013 as part of its wider Regulatory Consistency Assessment Programme.