On August 31, 2020, the Office of the Superintendent of Financial Institutions (“OSFI”) issued a press release announcing that it is phasing out certain measures put in place earlier this year in response to the COVID-19 pandemic, relating to the special capital treatment of loan and insurance premium payment deferrals. These prior measures were announced by OSFI via March 27 and April 9, 2020 press releases. For details on all of the temporary measures that OSFI put in place at the start of the coronavirus pandemic, please see our: March 20 blog post, March 30 blog post, and our April 15 blog post.

Beginning of the Transition Back to the Standard Regulatory Position

OSFI stated that its decision to discontinue these specific measures, which permit loan and insurance premium payment deferrals to be treated as performing, reflects their temporary nature and will ensure that reporting requirements remain accurate in reflecting credit risk. OSFI further elaborated in both of its letters to banks and insurers that while the special capital treatment related to premium and payment deferrals was warranted at the onset of COVID-19, both lenders and borrowers, and insurers and their clients, adapted to the unprecedented disruptions related to the pandemic. Banks are now in a better position to employ their business-as-usual alternatives to support troubled borrowers, and insurers are in a better situation to respond to pressures with business-as-usual measures. As such, the special capital treatment for loan payments and premium deferrals is no longer warranted.

OSFI announced that it “has begun the careful transition back” to its standard regulatory and supervisory position, since, over the course of the past five months, institutions have demonstrated their resilience and continue to adapt their risk management tools, operations, and processes to the current environment.

OSFI also stated that, as the economy stabilizes, risks remain in the financial sector. OSFI will continue to monitor conditions and maintain frequent contact with institutions to assess their operational capacity and management of the current economic challenges, and will remain ready to take any further required action.

Phasing Out of Measures for Federally Regulated Deposit-Taking Institutions

OSFI announced in its letter to federally regulated deposit-taking institutions (“DTI”s) the following updates to the special capital treatment of loans subject to payment deferrals:

• Eligible Six-Month Deferrals: Loans granted payment deferrals before August 31 will continue to be treated as performing loans under the Capital Adequacy Requirements (“CAR”) Guideline for the duration of the deferral, up to a maximum of six calendar months from the effective date of the deferral. For example, a loan that was granted a payment deferral with an effective date on July 31 will continue to be treated as a performing loan pursuant to the special capital treatment for the duration of the deferral, for a maximum of six calendar months from the effective date of the deferral, or up to January 31, 2021;

• Eligible Three-Month Deferrals: Loans granted new payment deferrals after August 30 and on or before September 30 will be treated as performing loans under the CAR Guideline for the duration of the deferral, up to a maximum of three calendar months from the approval date of the deferral. For example, a loan, that has not previously been granted a payment deferral, but is granted a new payment deferral with an approval date on September 30, would be treated as a performing loan pursuant to the special capital treatment for the duration of the deferral, for a maximum of three calendar months from the approval date of the deferral, or up to December 31, 2020; and

• Non-Eligible Deferrals: Loans granted payment deferrals with approval dates after September 30, 2020 will not be eligible for the special capital treatment. For example, a loan granted a payment deferral on or after October 1 as part of a DTI’s business-as-usual support programs for troubled borrowers will not be eligible to receive the special capital treatment.

However, OSFI has not yet announced that it will phase out other COVID-19 measures that adjusted capital requirements for banks, specifically adjustments to the leverage ratio calculation and the capital floor (discussed in our April 15 blog post.)

Furthermore, the Domestic Stability Buffer remains at 1.00% of risk-weighted assets (it was lowered from 2.25% on March 13, 2020). Also, on July 13, 2020, OSFI announced that it plans to gradually restart its policy development in the fall (it had suspended all consultations and policy development on March 13, 2020). (These measures are discussed in our March 20 blog post.)

Phasing Out of Measures for Federally Regulated Insurers

OSFI announced in its letter to federally regulated insurers the following updates to the special capital treatment that applies when loan payment deferrals or premium deferrals have been granted:

• Eligible Six-Month Deferrals: The special capital treatment for payment or premium deferrals granted before August 31 will remain limited to a maximum of six calendar months from the effective date of the deferral. For example, a loan that was granted a payment deferral with an effective date on July 31 will continue to be treated as a performing loan pursuant to the special capital treatment for the duration of the deferral, for a maximum of six calendar months from the effective date of the deferral, or up to January 31, 2021.

• Eligible Three-Month Deferrals: A new payment or premium deferral granted for the first time after August 30 and on or before September 30 will receive the special capital treatment for the duration of the deferral, up to a maximum of three calendar months from the approval date of the deferral. For example, a new premium payment deferral granted for the first time, with an approval date on September 30, would be eligible for the special capital treatment for the duration of the deferral, for a maximum of three calendar months from the approval date of the deferral, or up to December 31, 2020.

• Non-Eligible Deferrals: Payment and premium deferrals with approval dates after September 30, 2020 will not be eligible for the special capital treatment. For example, a loan granted a payment deferral on or after October 1 as part of a life insurer’s business-as-usual support programs for troubled borrowers will not be eligible to receive the special capital treatment.

OSFI has not phased out the LICAT interest rate risk requirements. On April 9, OSFI announced that the interest rate risk requirement for Q2 2020 will be the “rolling average approach”, under which a par block in any given quarter must be equal to the rolling average of the six immediately-preceding quarters. OSFI stated that this approach will remain in place until further notice. (This measure is discussed in our April 15 blog post.)