Appendix I. Recommendations of the 2014 Assessment
Appendix II. Main Regulatory Developments
Several amendments have been made to the Bank Act (BA) and the Trust and Loan Companies Act (TLCA) since 2014.
In 2014, the BA was amended to add regulation-making powers respecting a bank’s activities in relation to derivatives and benchmarks. As discussed earlier, additional amendments were made to federal financial institution statutes to discontinue supervision of provincial central cooperative credit societies1 by OSFI and to facilitate the entry of provincial cooperative credit societies into the federal credit union system by simplifying the process for continuation and amalgamation that applies to them.
Further amendments were made to the BA and the TLCA in 2015 to enhance the protection of prescribed supervisory information that relates to FRFIs.
The Bank Act was further amended in 2016 to: (i) facilitate the continuance of local cooperative credit societies as federal credit unions by granting the Minister of Finance the authority to provide transitional procedural exemptions, as well as a loan guarantee; and (ii) allow the designation of domestic systemically important banks by the Superintendent of Financial Institutions and require such banks to maintain a minimum capacity to absorb losses.
Additional amendments were made to the BA and the TLCA on June 21, 2018 to extend the scope of activities related to financial services in which federal financial institutions may engage, including activities related to financial technology, as well as modernize certain provisions applicable to information processing and information technology activities. These amendments are not yet in force.
The Department of Finance has been consulting with stakeholders during 2017–18 on legislative proposals to modernize provisions of the Bank Act, Trust and Loan Companies Act and Insurance Companies Act concerning the corporate governance of federally-regulated financial institutions. Legislation is anticipated to be introduced in 2019.
In addition, OSFI has been steadily updating its guidelines in line with regulatory reform agenda of the international standard setting bodies. Since the previous assessment OSFI issued or updated the following guidelines:
Capital Adequacy Requirements—has been updated to:
2019 (to be finalized)—incorporated domestic implementation of the standardized approach to counterparty credit risk (SA-CCR) and the revisions to the capital requirements for bank exposures to central counterparties (CCPs) as well as revisions to the securitization framework.
2018—incorporated necessary amendments to implement the Total Loss Absorbing Capacity regime and for capital treatment of allowances as a result of the adoption of IFRS 9; incorporated changes to the output floor.
2017—clarified application to federal credit unions regarding qualifying capital instruments, deductions from capital and transitioning of non-qualifying instruments; revised the treatment of insured residential mortgages to emphasize that credit risk insurance is a risk mitigant (guarantee) that relies on the due diligence of a mortgage originator with respect to the requirements of a mortgage insurance contract; clarified how national discretion will be exercised in the implementation of the countercyclical buffer, including the reciprocity of countercyclical buffers put in place in other jurisdictions; implemented the equity investment in funds rules issued by the Basel Committee on Banking Supervision (BCBS).
2016—introduced a downturn loss given default floor for uninsured residential mortgages (2017 for insured mortgages),
2014—introduced the credit valuation adjustment capital charge.
Liquidity Adequacy Requirements—introduced in 2014 to incorporate the liquidity requirements coming out of various BCBS documents. OSFI implemented the Liquidity Coverage Ratio (LCR, standard in January 2015 with a minimum requirement of 100 percent (i.e., no phase-in). OSFI also incorporated the standardized Basel III liquidity monitoring tools (e.g., concentration of funding, available unencumbered assets, etc.) in 2015. Further, in 2015, OSFI formalized the use of the domestic Net Cumulative Cash Flow (NCCF) metric as a supervisory tool. Although the NCCF is not a standard with a uniform minimum requirement, OSFI has communicated a private target tailored to each supervised institution. OSFI has also communicated its intention to implement the Net Stable Funding Ratio (NSFR) in January 2020.
Leverage Requirements (Draft)—introduced in 2014 and in process of being updated in 2018. The guideline transposes leverage requirements issued by the BCBS into OSFI guidance appropriate for Canadian banks. The revised version will 1) incorporate the Standardized Approach to Counterparty Credit Risk (SA-CCR) for calculating derivatives exposures; 2) will include changes to the treatment of securitized assets that meet the operational requirements for recognition of significant risk transfer (SRT) in order to align with proposed revisions to the Capital Adequacy Requirements guideline and 3) will align treatment of the credit conversion factors for off-balance sheet securitization exposures with those under the proposed revisions to the CAR guideline.
Total Loss Absorbing Capacity—introduced in 2018 to implement the TLAC regime. The guideline sets out the framework within which the Superintendent will assess whether a Domestic Systemically Important Bank maintains its minimum capacity to absorb losses pursuant to subsection 485(1.1) of the BA.
Total Loss Absorbing Capacity Disclosure Requirements—introduced in 2018 to implement disclosure requirements for the TLAC regime for Domestic Systemically Important Banks. The guideline, which incorporates the TLAC disclosure templates published in the BCBS Pillar 3 Disclosure Requirements—consolidated and enhanced framework standards (issued in March 2017), will be in force as of September 2018.
D-11 Public Disclosure Requirements for Domestic Systemically Important Banks on Liquidity Coverage Ratio—introduced in 2014 to set out the public disclosure requirements regarding the LCR for Domestic Systemically Important Banks.
D-12 Leverage Ratio Disclosure Requirements (Draft)—introduced in 2014, with a revised version to be issued in late 2018—the guideline provides clarification on the implementation of the BCBS LR disclosure requirements. The revised 2018 version will include minor consequential amendments to reflect amendments to OSFI’s Leverage Requirements and Capital Adequacy Requirements guidelines.
IFRS 9 Financial Instruments and Disclosures—introduced in 2016 to provide guidance on the application of IFRS 9. The guideline addresses the expected loss framework, fair value option and various disclosure requirements related to financial instruments. It consolidates a number of existing guidelines that will be removed beginning in November 2018.
Pillar 3 Disclosure Requirements—introduced in 2017 to clarify OSFI’s expectations regarding domestic implementation of the Revised Pillar 3 Disclosure Requirements issued by the BCBS in January 2015.
Corporate Governance (Draft)—the updated final version to be issued in September 2018 will be more principles based and outcomes based, i.e., what the Board should achieve, will more clearly delineate board and senior management responsibilities and will consolidate board requirements contained in other risk management or capital guidance.
B-7 Derivatives Sound Practices—updated in 2015 to reflect the over-the-counter (OTC) derivatives market reforms initiated by G-20 leaders and communicate OSFI’s expectations for central clearing of standardized OTC derivatives and reporting derivatives data to a trade repository. The guideline also reflects current practices with respect to the risk management of derivatives activities.
E-13 Regulatory Compliance Management—issued in 2014 as an updated version of former guideline Legislative Compliance Management. The guideline sets out OSFI’s expectations for the management of regulatory compliance risk inherent in business activities enterprise-wide.
E-20 CDOR Benchmark-Setting Submissions—introduced in 2014 to assist Canadian Dollar Offered Rate submitting banks in establishing strong governance and controls in order to maintain confidence in CDOR as a robust interest benchmark in Canada.
E-21 Operational Risk Management—introduced in 2016 to reinforce OSFI’s principles-based expectations regarding the management of operational risk.
E-22 Margin Requirements for Non-Centrally Cleared Derivatives—introduced in 2017 to require the exchange of margin to secure performance on non-centrally cleared derivatives transactions between covered entities. The requirements are consistent with those issued by the BCBS and the Board of the International Organization of Securities Commissions and support the financial stability objectives of the international framework.
E-23 Enterprise-wide Model Risk Management for Deposit-Taking Institutions—introduced in 2017 to establish OSFI’s expectations for institutions in managing and controlling the use of models, whether for regulatory capital determination, internal risk management, valuation/pricing, business decision-making or stress testing purposes.
In addition, and in response to risks in the Canadian market, OSFI updated its residential mortgage underwriting guidelines.
B-20 Residential Mortgage Insurance Practices and Procedures—introduced in 2012 and updated in 2017, the guideline builds on the Financial Stability Board’s international Principles for Sound Residential Mortgage Underwriting Practices and OSFI’s own domestic supervisory work. The guideline sets out OSFI’s expectations for prudent residential mortgage underwriting, which are articulated through five fundamental principles. The 2017 update reinforced OSFI’s expectations through key changes, including a revised stress test, the need for lenders to establish and adhere to appropriate loan to value ratio limits and restricting lending arrangements designed to (or appear so) circumvent loan to value limits.
B-21 Residential Mortgage Insurance Underwriting Practices and Procedures—introduced in 2014 to set out the OSFI’s expectations for prudent residential mortgage insurance underwriting and related activities. (Note: this guideline does not apply directly to banks, but is based on principles set out in guideline B-20)
In Québec, the most significant legislative change is the enactment of Bill 141 on June 13, 2018. The most important legislative change since 2014 is the amendments enacted by Bill 141 to the AMF Act respecting financial cooperatives services in order to:
add a scheme to supervise and control deposit institution business and authorized deposit institutions, including commercial practices standards, prudential and governance rules, the auditor’s role, the conditions for authorizing a deposit institution, the review of such an authorization in various circumstances and the revocation or suspension of, or the attachment of conditions or restrictions to, such an authorization;
determine the AMF’s responsibilities and powers with regard to supervision and control;
add the possibility for the AMF, as the insurer of deposits made with authorized deposit institutions, to take different measures to reduce the risk to the AMF or to avert or reduce a threatened loss to the AMF and to plan operations to resolve problems that could arise from the failure of financial institutions belonging to a cooperative group;
prescribe miscellaneous prohibitions and monetary administrative penalties; and
set the conditions under which the Minister of Finance may enter into agreements allowing a cooperative outside Québec having a mission similar to that of a financial services cooperative to obtain an authorization to carry on deposit institution activities in Québec.
The following guidelines were introduced or updated by AMF:
This new guideline came into effect on May 1, 2015. It is primarily intended to clarify the expectations of the AMF regarding the implementation by financial institutions of an internal assessment process of their risks in connection with their capital (ICAAP).
Integrated Risk Management Guideline (Update)
This guideline was updated on May 1, 2015, mainly to take into account new expectations relating to ICAAP. In addition, the AMF took this opportunity to clarify and reinforce its expectations, particularly with respect to risk appetite and the links between the risk management framework, the solvency position, the strategic objectives and their communication within the board of directors and senior management.
Risk Data Aggregation and Risk Disclosure Guideline (New)
The Guideline Governing Risk Data Aggregation and Risk Disclosure came into effect on February 1, 2016. It is exclusively applicable to federations of credit unions governed by An Act respecting financial services cooperatives, CQLR, c. C-67.3.
In this guideline, the AMF expects financial institutions to implement a framework enabling them to properly aggregate all material risk data and to disclose them to market participants in an accurate, timely manner appropriate to the circumstances. Moreover, the financial institutions are expected to ensure the accuracy, adaptability and timeliness of material risk data, based on the implementation of a control framework governing the data aggregation process. Furthermore, the AMF expects the risk data aggregation capability to be effective at all times, even during a crisis. The guideline also focuses on the fact that the reports produced shall enable stakeholders to clearly track the institution’s ongoing exposure to risk, along with the effectiveness and efficiency of measures for handling risk.
Governance Guideline (Update)
The AMF Governance Guideline has been completely revised with an effective date on September 15, 2016. The new version aims to complete and clarify the roles and responsibilities expected from the Board of Directors and to reinforce the importance for its members to be independent and to promote a transparent, ethical and responsible corporate culture. In addition, the roles of the Chairman of the Board and the Audit Committee are discussed in more details.
Operational Risk Management Guideline (New)
The Operational Risk Management Guideline came into effect on December 1, 2016. With respect to governance, this guideline aims to promote the strengthening of the risk culture since the identification, assessment, control, mitigation and oversight of operational risk require the commitment of all internal stakeholders and primarily the board of directors, senior management and the different lines of defense.
Compliance Guideline (Update)
With an effective date of April 15, 2017, the AMF has updated its Compliance Guideline to ensure consistency with recent changes to other AMF Guidelines, including Governance and Integrated Risk Management.
The changes made to the Guideline were also intended to reinforce the importance of effective and efficient compliance management that requires the commitment of all parties in the institution, including the Board of Directors, senior management and the three lines of defense. With this in mind, a new expectation specifying the roles and responsibilities of the various lines of defense (related to the Governance Guideline), including in particular those of the Chief Compliance Officer, has been added.
Residential Hypothecary Lending Guideline (Update)
In order to avoid regulatory arbitrage in the Canadian housing market and ensure a level playing field relative to federal institutions (who are subject to OSFI’s updated B-20 Guideline) the AMF published in March 2018 an updated version of its Residential Hypothecary Lending Guideline. This updated version includes new provisions on mortgage underwriting standards and stress testing (equivalent to those introduced by OSFI in its updated version of B-20). Although the AMF’s Guideline came into force in March 2018, an agreement was reached with the Desjardins Group, in the fall of 2017, that Desjardins, as a D-SIFI, would comply with the new provisions as of January 1st, 2018 (simultaneous to the application of these provisions by the Canadian banks).
Fair Consumer Credit Practices Guideline (New)
This Guideline came into effect in July 2018. The AMF closely monitored household debt given that it was materially related to the credit risk of financial institutions. For example, an increase in interest rates, an economic slowdown, a drop-in income, a life event or unexpected financial needs could pose a major challenge to many consumers, especially those who are, or are becoming, overindebted.
This Technical Note was prepared by Dirk Jan Grolleman (IMF) and Toby Fiennes (IMF short-term expert) under guidance of Phakawa Jeasakul (FSAP deputy mission chief). The review was conducted as part of the 2019 Canada FSAP led by Ghiath Shabsigh (FSAP mission chief). The review reflects the regulatory and supervisory frameworks as per November 9, 2018.
Shortly after the assessment, a second credit union received a federal license.
This does not include any deposits or assets held by the Desjardins Federation.
After the assessment, OSFI published in April 2019 a Large Exposure Guideline for D-SIBs (implementation date November 2019).
OSFI’s B20 Guideline sets out OSFI’s expectations for prudent residential mortgage underwriting. Originally issued in 2012 and since updated, it articulates five fundamental principles for sound residential mortgage underwriting. The first principle relates to the lender’s own internal governance, the next three relate to the credit decision and the underwriting decision, and the final one relates to risk management including mortgage insurance where applicable.
BCBS, Prudential treatment of problem assets – definition of nonperforming exposures and forbearance (April 2017).
The Basel framework does not allow to take conditional guarantees into account under the Standardized Approach and Foundation Internal Ratings Approach. Under the Advanced Internal Ratings Based Approach, the Basel Framework makes an exception in this regard (see BSCBS, International Convergence of Capital Measurement and Capital Standards, June 2006, paragraph 484), however, this exception is only applicable for LGD modelling.
After the assessment, OSFI published the final guideline (implementation date January 1, 2020) in April 2019.
The liquidity adequacy requirements guideline requires brokered retail deposits to be categorized as less stable retail funding, which has a run-off under the existing framework of 10 percent. However, given run-off experiences in the market, OSFI has finalized in 2019 changes to its Liquidity Adequacy Requirements guideline to reflect higher run-off rates, depending on the characteristics of these deposits.
Issued by the Asia/Pacific Group, a regional Financial Action Task Force (FATF) style body.
Shortly after the assessment, one of the larger provincially-regulated credit union became a federally regulated credit union, bringing the total number of credit unions overseen to 41. As of December 2018, the total assets of the 41 amount to USD 63.5 billion.
Important weaknesses are identified and documented in the 2014 report on the supervision of credit unions by the Auditor General of British Columbia.
Previously subject to dual regulation and supervision by the relevant provincial authority and OSFI.