Backgrounder: Draft Guideline B‑2 – Large Exposure Limits for Small and Medium-Sized Banks

What Changed

• - Extends the scope of Guideline B‑2 (Large Exposure Limits) beyond domestic systemically important banks (DSIBs) to include Category 1 and Category 2 small and medium‑sized banks (SMSBs), bringing them under a harmonized large exposures regime.
• Replaces the existing 1994 large exposure guideline for Category 1 and Category 2 SMSBs with a single modern framework aligned to the January 2019 version of Guideline B‑2.
• Removes Category 3 SMSBs from the large exposure guideline regime, so they will no longer be subject to OSFI large exposure limits under Guideline B‑2.
• Removes foreign bank branches from the scope of the large exposure guideline, so foreign bank branches will no longer be subject to Guideline B‑2 requirements.
• Introduces a hard limit for Category 1 and Category 2 SMSBs that total exposures to a single counterparty or group of connected counterparties must not exceed 25% of the institution’s Tier 1 capital.
• Aligns exposure measurement for large exposure purposes with capital requirements by requiring exposures to be measured net of eligible credit risk mitigation in line with OSFI’s capital guidelines.

Suggested Considerations

• Conduct an impact assessment to quantify current single‑name and connected‑counterparty exposures relative to the proposed 25% of Tier 1 capital limit for Category 1 and Category 2 SMSBs.
• Identify and map all existing large exposure policies, procedures, and limits that are based on the 1994 large exposure guideline and plan their replacement with a framework aligned to the 2019 Guideline B‑2 approach.
• Review and, where necessary, redesign methodologies and internal criteria for identifying groups of connected counterparties so they are consistent with OSFI’s updated expectations under the draft revised Guideline B‑2.
• Update credit risk measurement processes and systems so that exposures for large exposure purposes are calculated net of eligible credit risk mitigation in line with OSFI capital requirements.
• Assess data, systems, and reporting capabilities to ensure the institution can produce quarterly large exposure reports using the same template as larger banks, including drill‑downs by counterparty and connected counterparty groups.
• Develop and approve revised large exposure limits and concentration risk appetite statements at board or board‑committee level, ensuring that the 25% Tier 1 capital constraint is embedded in risk appetite and limit structures.

Key Dates

Who is Affected