Basel III - Amendments to the Liquidity Coverage Ratio
On January 6, 2013, the Group of Governors and Heads of Supervision (the “GHOS”), which oversees the Basel Committee on Banking Supervision (the “Basel Committee”), announced it would be amending the Basel III liquidity coverage ratio (the “LCR”). In connection with the announcement, Mervyn King, chairman of the GHOS and governor of the Bank of England, stated that for the first time in regulatory history, there will be a truly global minimum standard for bank liquidity.
In particular, (i) a phased timetable to introduce the LCR, and (ii) reaffirmation that a bank’s liquid assets are available in times of stress, will help ensure the new liquidity standard does not hinder the global banking system’s ability to finance a recovery.
History
The LCR standard was first published by the Basel Committee at the end of 2010, as part of the Basel III regulatory standards. Basel III supplemented the existing international Convergence of Capital Measurement Document (Basel II) which came into effect in 2008 across the European Union and in many other jurisdictions. At the time of Basel III’s publication, it was anticipated that the new measures would help strengthen the regulation and facilitate the supervision and risk management of the banking sector as a whole. However, critics have argued that the Basel III 2010 LCR standard was too onerous, and that it adversely affected lending activity when many financial systems were under stress.
Revisions to the LCR
The LCR is an essential component of the broader Basel III reforms. The revised standard builds on traditional liquidity coverage ratio methodologies used internally by banks to assess exposure to contingent liquidity events. It has two components: (i) the value of the stock of unencumbered high quality liquid assets (“HQLA”) in stressed conditions, and (ii) total net cash outflows.
The revised LCR was developed as a way to promote short-term resilience of a bank’s liquidity risk profile by ensuring it has sufficient HQLA to survive a significant stress scenario lasting 30 calendar days. The LCR reflects the ratio of a bank’s HQLA to its net cash outflows over the next 30 calendar days. In its press release dated January 6, 2013, the Basel Committee stated that the amendments would help prevent central banks from becoming ‘lenders of first resort’.
The revised ratio loosens some limitations of the original LCR, primarily by expanding the assets eligible to be treated as liquid assets and by altering the predicted outflow and inflow rates to more accurately reflect real-world scenarios. As it is less onerous than the original formulation, the revised LCR is expected to be welcomed by the banks.
Highlights of the amendments to the LCR standard include:
- revisions to the definition of HQLA and net cash outflows;
- a timetable for phase-in of the standard to be introduced on January 1, 2015 in stages, with an initial 60% liquidity requirement rising annually by 10% to 100% by 2019;
- a reaffirmation of the availability of a bank’s liquid assets in periods of stress, including during the transition period in which banks may fall below the required LCR thresholds; and
- an agreement for the Basel Committee to conduct further work on the interaction between the LCR and the provision of central bank facilities.
Once the phase-in arrangements are complete, the amended standard will require that, absent a situation of financial stress, the value of the LCR must be no lower than 100% (i.e., the value of HQLA should at least equal total net cash outflows). Banks are expected to meet this requirement on an ongoing basis and hold unencumbered HQLA as a defence against the potential onset of liquidity stress. During a period of financial stress, however, banks may use their HQLA (causing the LCR to fall below 100%).
Canadian Perspective
In Canada, the Office of the Superintendent of Financial Institutions (“OSFI”) is the national authority charged with implementation of Basel III, and has recently joined the growing group of international regulators committed to implementing Basel III in their domestic regulatory frameworks. OSFI has made concerted efforts to accelerate the implementation of Basel III in Canada on a basis that makes sense for Canadian institutions.
OSFI stated it is confident that over time these initiatives will help foster public confidence in the implementation of Basel III, and demonstrate that the promises made by G20 countries, such as Canada, are being matched by actions. Much remains to be accomplished, but OSFI stated publicly that the end result will be a safer, more resilient financial system in Canada.
Referring to the LCR, the Assistant Superintendent of OSFI was recently quoted as saying OSFI will need to fully examine how its existing liquidity monitoring tools should be used in conjunction with the new international standards.
Much like in other jurisdictions, the changes are anticipated to be well received by Canadian banks, not only because the LCR standard has been eased, but also because they will now have more time to comply with the rule. The Bank of Canada Governor, Mark Carney, has stated that it will prove to be competitively advantageous for the Canadian banking system.
Some jurisdictions have not, however, completed the migration from the original Basel I to Basel II, much less implemented Basel III. OSFI recognizes that if countries do not follow through, there is a risk that countries, like Canada, that do implement Basel III could find their banks at a disadvantage in international markets. Canadian banks may even confront unfair competition from foreign banks domestically. These challenges will need to be addressed as OSFI works towards implementing Basel III.
Insights
-
Financial Services Regulatory
Canadian Securities Administrators Extend Compliance Deadline in Interim Approach to Value-Referenced Crypto Assets
On April 17, 2024, the Canadian Securities Administrators (CSA) provided an update to their interim approach in respect of “Value-Referenced Crypto Assets” (VRCAs), as set out in the CSA’s guidance in… -
Financial Services Regulatory
Obligations and Opportunity - Budget 2024’s Impact on the Blockchain Industry
As crypto-assets become subject to further regulation both domestically and globally, industry players find themselves presented not only with new obligations but also with new opportunities. Canada’s… -
Financial Services Regulatory
Budget 2024 Announces Additional Measures to Combat Financial Crime
In Budget 2024, the Government of Canada announced its intentions to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), the Criminal Code, the Income Tax Act, and… -
Financial Services Regulatory
OSFI Releases New Framework to Modernize Financial Supervision
On February 8, 2024, the Office of the Superintendent of Financial Institutions (OSFI) announced a new framework (the “Framework”) for supervising federally regulated financial institutions (FRFIs… -
Financial Services Regulatory
The Bank of Canada Opens Consultation for Supervisory Guidelines
The Bank of Canada continues preparations for its supervision of payment service providers (PSPs) under the Retail Payment Activities Act (RPAA). The Bank has published draft supervisory guidelines… -
Financial Services Regulatory
Bank of Canada publishes guidance for registration under the Retail Payment Activities Act
As the November 1 – 15, 2024 window for registration of payment services providers (“PSPs”) approaches, the Bank of Canada (the “Bank”) has published guidance for PSPs determining: (i) whether the…
Featured Work
-
Tax
Cineplex announces comprehensive refinancing plan
Goodmans is acting for Cineplex Inc., a leading Canadian entertainment and media company, in connection with its announcement of a comprehensive refinancing plan to improve financial flexibility and… -
Mergers and Acquisitions
FASHIONPHILE acquires Two Authenticators Business
Goodmans LLP acted for FASHIONPHILE, LLC in connection with its purchase of the assets of Two Authenticators Inc… -
Mergers and Acquisitions
Gamut Capital Management Acquires Extreme Reach
Goodmans LLP acted for Gamut Capital Management, L.P. (“Gamut”), a leading New York-based middle market private equity firm, in its acquisition of Extreme Reach, Inc. (“Extreme Reach” or “ER”) — a… -
Restructuring
MAV Beauty Brands Inc.'s Restructuring Proceedings
Goodmans LLP acts for Alvarez & Marsal Canada Inc. in respect of MAV Beauty Brands Inc., a publicly traded global hair care and personal care company focused on managing a diversified portfolio of… -
Mergers and Acquisitions
Group led by Michael Andlauer buys Ottawa Senators
Goodmans LLP acted for an entity controlled by Michael Andlauer in its purchase of the Ottawa Senators Hockey Club from the Melnyk Estate… -
Banking and Financial Services
Finastra Group $5.32 billion refinancing
Goodmans LLP acted for Finastra International Limited in the full refinancing of its existing credit facilities and restructuring of its capital structure…
News & Events
-
Banking and Financial Services
Goodmans Lawyers Recognized in the Lexpert Special Edition: Finance and M&A 2024
We are delighted to announce the Lexpert Special Edition: Finance and M&A 2024 once again features Goodmans lawyers among Canada's experts.Congratulations to our 33 featured lawyers:Alan… -
Banking and Financial Services
The Canadian Legal Lexpert Directory 2024 Continues to Recognize Goodmans
We are proud to announce Goodmans LLP has once again been recognized in the 2024 edition of The Canadian Legal Lexpert Directory.91 Goodmans lawyers have been recognized as top-tier in their… -
Banking and Financial Services
Chambers and Partners Continues to Honour Goodmans with Global Recognition
We are proud to announce Goodmans LLP has once again received top-tier recognition from Chambers and Partners in the Chambers Global 2024 Guide released today. Recognition from…