How is the OSFI regulating the HASCAP Guarantee in Canada

I came across this interesting post written by an articling student within McMillan law firm about how the OSFI (the Office of the Superintendent of Financial Institutions) regulating banks and “deposit-taking institutions” (DTIs) in regards to HASCAP, the Canadian government’s 100% guarantee for highly-affected sector companies.

I am posting here for businesses to learn more.

On January 27, 2021, the Office of the Superintendent of Financial Institutions (OSFI) issued timely guidance to federally regulated deposit-taking institutions (DTIs) on the capital treatment of the loans guaranteed by BDC. In short, OSFI expects the Lender to treat HASCAP loans as a sovereign exposure. OSFI has confirmed that the guarantee from BDC meets the relevant operational requirements under sections 75 and 76 of Chapter 5 of OSFI’s Capital Adequacy Requirements (CAR) Guideline (meaning that it can be treated as an exposure to the Government of Canada). However, the amount of the guarantee recognized for capital purposes will need to be adjusted, in accordance with section 5.1.6. of the CAR Guideline, if there are currency mismatches or maturity mismatches between the loan and the BDC guarantee.

OSFI has further advised that the following risk weightings are to be applied under the CAR Guideline:

  • under the Standardized Approach to credit risk, the HASCAP loan would receive the 0% risk weight applicable to the Government of Canada (as the loan guarantor) pursuant to section 3.1.3. paragraph 10(i) of the CAR Guideline; and
  • under the Internal Ratings Based Approach to credit risk, the HASCAP loan would be treated with the Probability of Default substitution approach or the Loss Given Default adjustment approach pursuant to section 6.8.7.(ix) of the CAR Guideline.

The entire amount of the HASCAP loan is to be included in a lender’s leverage ratio calculation. Specifically, the loan needs to be included in the exposure measure of the ratio in accordance with paragraph 12 of OSFI’s Leverage Requirements Guideline.

This capital treatment is similar to the expectations for Export Development Canada’s loan guarantee program for small and medium-sized businesses (for which the guaranteed amount may be up to USD 10,000,000).

OSFI will continue to issue direction, as needed, to assist DTIs in ensuring that capital and liquidity requirements are appropriate during the uncertainty of the COVID-19 pandemic.

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