Changes to the Liquidity Adequacy Requirements Guideline

Why is OSFI introducing new categories and run-off rates for less stable deposits at this time?

The current version of the LCR includes a category of less stable deposits for retail and small business customers. This category encompasses several heterogeneous components that all receive a flat 10% run-off rate. This aggregation and single run-off rate does not appropriately consider certain customer and deposit product attributes that may lead to increased risk of deposit withdrawal in a stressed environment. OSFI believes that some customer and product attributes warrant a higher run-off rate. OSFI notes that the Basel LCR rules expect supervisors to develop additional categories of less stable deposits that reflect circumstances in their jurisdiction. The revised version of the guideline incorporates new categories in the LCR to increase its risk-sensitivity and to assign more appropriate run-off assumptions to some components of less stable deposits.

How did OSFI define the new categories and corresponding run-off rates for less stable retail deposits?

OSFI considers that the main contributors to the stability of retail deposits are the presence of an established client-institution relationship, the level of sophistication of the depositor managing the funds, and the rate sensitivity of the deposit product. The revised guideline segments the less stable retail deposit category along these attributes. Rates are commensurate with the expected risk of withdrawal of the deposit.

What is the rationale for OSFI decreasing the run-off rate for uninsured retail deposits to 10% from the 15% rate proposed in the public consultation?

While revising the run-off rates for less stable retail deposits, OSFI tried to ensure deposits that exhibit different characteristics are consistently and appropriately assigned run-off rates according to their risk of withdrawal in a stressed environment. The public consultation provided compelling evidence to support not increasing the run-off rate for uninsured retail deposits to 15% (as was proposed in the public consultation) and instead maintaining the run-off rate at 10% as is currently applied.

Why is OSFI expanding the definitions of established relationship and transactional account and introducing a definition for rate-sensitive deposits? Why is OSFI not allowing institutions to use their own internal definitions for these concepts?

The definitions of established relationship , transactional account and rate-sensitive deposits are critical to the appropriate categorization of deposits under the LAR Guideline. They directly influence the run-off rates applied to retail deposits in the LCR and NCCF. The accurate classification of deposits using these concepts is even more important now given the move away from a flat 10% run-off rate for all less stable retail deposits. Through its supervisory work since the introduction of the LCR, OSFI has observed a wide range of institution practice in applying these concepts. The guideline more clearly articulates these key definitions, which will lead to more comparable and predictable outcomes when institutions classify these deposits under the liquidity metrics.

OSFI opted for a presumptive approach to assess whether a client and institution have an established relationship. Evidence suggested that the proposed definition was too restrictive and was not representative of certain elements of current industry practice. OSFI expanded the list of criteria to include additional factors that can demonstrate the strength of a client’s connection to its institution such that meeting one of the criteria allows the institution to clearly demonstrate that an established relationship exists. In order to address unforeseen situations or future market practices, OSFI retained the flexibility to consider other valid characteristics that demonstrate the presence of an established relationship.

Regarding the definition of a transactional account, OSFI considered comments that suggested focusing on a utilization test of the account rather than relying on generic characteristics of the account (e.g. ability to write cheques). Such generic characteristics may not be indicative of or aligned with the intent of classifying an account as transactional. In addition, OSFI expanded the criteria related to a customer’s salary being automatically deposited in an account. The criteria now include non-salary income (e.g. pension income, government social assistance), which aligns with the original intent of this criteria, i.e., characteristics are present that enhance the stability of a deposit.

Revisions to the language for rate sensitive deposits shift the focus away from the marketing aspect of a deposit towards an identification of outliers (i.e. deposit rates paid that are significantly higher than comparable products). OSFI did not incorporate the suggestion to set a quantitative benchmark around this classification because the deposit rates offered by institutions should be the result of business decisions and competing forces, not the result of regulations. Lastly, several institutions raised concerns that the use of the high interest saving account (HISA) label in the public consultation draft could be misleading as this term is often used for flagship products offered in the retail deposit business. To address this concern, OSFI adopted the term Rate Sensitive Deposits.

We understand that the NSFR will initially apply only to the D-SIBs. What are OSFI’s plans for non-D-SIBs?

As of January 1, 2020, only the D-SIBs will be subject to the NSFR requirement. OSFI is undertaking an assessment of the approach for small and medium-sized institutions. Further guidance will be provided in due course.

We believe that the NSFR creates cliff effects at the one year and six month marks. Has OSFI considered further granularity in residual maturity time periods (e.g. introducing a 3-month bucket)?

OSFI believes the current structure of maturity buckets is appropriate. The NSFR standard encourages a sound funding structure by limiting short term reliance on wholesale funding. OSFI believes a diversified funding mix and laddered maturity structure mitigates cliff effects.

The required stable funding (RSF) factor for non-HQLA is punitive and is not representative of the liquidity characteristics of some segments of the market (i.e. financials).

OSFI’s liquidity standards are designed, in part, to reduce interconnectedness and limit contagion risk in the deposit-taking sector. For this reason, the LCR does not recognize securities representing obligations of financial institutions as HQLA. The NSFR RSF factor for non-HQLA securities reflects these considerations.

OSFI has designated only a limited set of transactions as interdependent. OSFI should extend this interdependent treatment to similar funding structures (e.g. ABS, covered bonds) and client-facilitation transactions.

In order to be considered as interdependent, the assets and liabilities of a particular set of transactions must meet several criteria to ensure that no residual liquidity risk remains. OSFI does not consider that the additional transactions suggested for interdependent treatment meet all the required criteria outlined in Chapter 3, paragraph 53.