OSFI Supervisory Framework

Contribute to public confidence in the financial system, and the safety and soundness of it thru supervision

• Assess safety and soundness of FRFIs
• Provide feedback
• Timely intervention

Safeguard depositors and p.h. from loss

Determine impact of current and potential future events on risk profile of FRFI's

• Consolidated supervision
• Relationship manager
• Principles-based supervision
• Supervisory intensity and intervention
• Board and sr mgt accountability
• Risk tolerance
• Reliance on external auditors
• Use of work of others

Main point of contact between OFSI and FRFI responsible for overall risk assessment of FRFI (ensure up to date)

• Sound judgement in iding and assessing risks
• Determining appropriate method for risk mgt

Depend on FRFI's

• nature
• size
• complexity
• risk profile
• consequence of failure.

• Ultimately accountable for safety and soundness and compliance with legislation
• Notify OSFI of issues that can have material adverse impact on FRFI

• Reduce scope of supervisory work
• Minimize duplication of effort.

• Focus on material risk: be able to id all material risks
• Forward-looking, early intervention: able to estimate future condition to allow timely intervention
• Sound predictive judgement
• Understanding the drivers of risk
• Differentiate inherent risks and risk mgt
• Dynamic adjustments
• Assessment of the whole institution

Risk with potential for loss to depositors or p.h.

• Understand
  • key causes of risks
  • how risks may develop
  • how severe
• Understanding comes from knowledge of
  • business model (products, strategies, risk appetite)
  • external environment

• Differentiate at operational and oversight levels, and
• Establish expectations for risk mgt and determine corrective actions

To arrive at composite view, combines assessments of

• earnings and capital in relation to overall net risk from sig activities
• liquidity

A LOB, unit or process that is fundamental to business model and ability to meet business objectives

• Org charts
• Strategic business plan
• Capital allocations
• Internal and external reporting

• Quantitative: activity's % of total:
  • asset,
  • revenue,
  • premium,
  • net income,
  • capital
• Qualitative:
  • strategic importance,
  • planned growth,
  • risk,
  • effect on reputation

Probability of a material loss due to exposure to and uncertainty from current and future events

Loss that could impair capital adequacy that leads to potential for loss to depositors or p.h.

• Credit
• Market
• Insurance
• Operational
• Regulatory Compliance
• Strategic

• Low / Moderate / Above avg / High
• Decreasing / Stable / Increasing

Assess without regard to size of activity relative to size of FRFI and before considering quality risk mgt

• For developing expectation for quality of risk mgt
• Higher the inherent risk, more rigorous day-to-day control and oversight

• Operational mgt
• Oversight functions

• Manages activities and their risks on a daily basis
• Ensures staff understand risks and how to manage them
• Ensures effective and sufficient policies, processes and staff in managing these risks

Whether capable of iding potential for material loss that activity may face and has adequate controls

• Using work of oversight function
• Periodically validate effectiveness of day-to-day controls

• Financial
• Compliance
• Actuarial
• Risk mgt
• Internal audit
• Sr mgt
• Board

• Look at risk at enterprise level and assess and manage risk
• Independent from operational mgt
• 7 oversight functions

Inherent risk after mitigation by QRM

• Low
• Medium
• High

Assessment of potential adverse impact that sig activities collectively could have:

• on earnings and capital adequacy
• and hence on depositors and p.h.

Net risks of sig activities are combined based on their relative importance

• Quality
• Quantity
• Consistency as a source of internally-generated capital
• Consider historical trends and future outlook under normal and stressed conditions

1. Strong
2. Acceptable
3. Needs improvement
4. Weak

1. Improving
2. Stable
3. Deteriorating

• Appropriateness of level and quality (current and future) under normal and stressed conditions, given overall net risk
• Effectiveness of capital mgt processes for maintaining adequate capital relative to risks across all sig activities

Level of liquidity risk and quality of liquidity mgt

Potential inability to purchase or obtain funds to meet obligations as they come due

• BS composition
• Its funding sources
• Its liquidity strategy
• Market conditions and events

• Assessment of risk profile, after considering assessments of earnings and capital in relation to overall net risk from sig activities and,
• Assessment of its liquidity

Used to determine its stage of intervention

• Planning supervisory work
• Execute supervisory work and update risk profile
• Report and intervention

1. Prepare supervisory strategy for each FRFI
2. Plan and prioritize supervisory work for
   • each significant activity
   • each oversight function
3. Compare work effort across FRFls

1. FRFl-specific monitoring
2. Scans external environment and industry
3. Reviews: more extensive than monitoring

• Analyze financial results (by LOB and vs. peers) and any sig internal developments
• Disccuss with FRFI's mgt and oversight functions

Counterparty's potential inability of unwillingness to fully meet obligations

• Loan loss/principal risk
• Pre-settlement/replacement risk
• Settlement risk

Potential changes in

• market rates,
• prices or
• liquidity in markets for int rates, credit, forex

Potential for claims payouts to p.h.

Potential problems due to inadequate or failed internal processes, people, or external events

• Day-to-day operations (breakdown in transaction processing, fraud, IT)
• Specific, unanticipated event (CAT, court decisions)

Potential non-conformance with laws, regulations

Potential inability to implement business plans and strategies, make decisions

• Analysis of overall and LOB/unit perf
• Analysis of major business cases to sr mgt and board highlighting matters requiring their attention
• Ensure effective financial reporting and MI system

• Set policies and procedures for adhering to regulatory req'ts
• Monitor compliance with these policies and procedures
• Report compliance matters to sr mgt and board

• Evaluate design, pricing and valuation of products
• Assess reasonableness of policy liabiltity provision
• Review exposure mgt models and reinsurance programs
• Analyze stress testing results
• Report results to sr mgt and board

• id enterprise-wide risks;
• dev systems for measuring risk;
• set policies and procedures to manage risks;
• dev risk metrics (stress tests) and tolerance limits;
• monitor positions against approved risk tolerance and capital levels;
• report results to sr. mgt and board

• Assess adherence to and effectiveness of operational controls and oversight incl corp gov processes
• Report on results of its work to sr mgt and board

• Dev business model and objectives, strategies, plans
• Dev and promote sound corp gov practices incl aligning employee compensation with LT interests of FRFI
• Execute and monitor achievement of business objectives, strategies and plans
• Ensure board is well informed

• Review and approve
  • business model and objectives, strategies and plans
  • corp risk policy incl overall risk appetite and tolerance
  • org and procedural controls
• Ensure
  • sr mgt is qualified and competent
  • principal risks are id'd and managed
  • compensation is aligned with LT interest of FRFI

• Characteristics exceed what's necessary, given nature, scope, complexity and risk profile of FRFI.
• Consistently demonstrated highly effective perf.
• Characteristics and perf are superior to sound industry practices