Internal Capital Adequacy Assessment Process (ICAAP) for ...

While OSFI makes use of information gleaned from an institution's ICAAP to assess the quality of risk management, OSFI does not approve an ... Skiptomaincontent Skiptosecondarymenu InternalCapitalAdequacyAssessmentProcess(ICAAP)forDeposit-TakingInstitutions PageContent AlternativeFormats PDF,239kB AccompanyingDocuments GuidelineImpactAnalysis Statement Letter DocumentProperties TypeofPublication:Guideline Category:SoundBusinessandFinancialPractices Date:October2010 No:E-19 Audiences:Banks/BHC/T&L ThisGuidelineoutlinesOSFI’sexpectationswithrespecttoan institution’sinternalcapitaladequacyassessmentprocessasdescribed inPart3oftheBaselIIFramework.Footnote1Itapplies tobanks,bankholdingcompaniesandtofederallyregulatedtrust andloancompanies,collectivelyreferredtoasinstitutions. OSFI’sCapitalAdequacyRequirements(CAR)guidelineestablishminimumstandardsforcalculatingminimumortarget regulatorycapitalrequirements. OSFI’ssupervisoryreviewprocessevaluatestheinherentrisk withineachsignificantactivityundertakenbyaninstitutionand thenevaluatesthequalityoftheriskmanagementappliedtomitigate theserisks.OSFI’sassessmentofaninstitution’sICAAPsupplements itsindependentassessmentofinherentriskandriskmanagement, andcanresultinfine-tuningoftheseassessments. TableofContents StatementofRegulatoryPrinciples ScopeoftheICAAP ExpectationsforanInstitution’s ICAAP I.Seniormanagement oversight II.Soundcapitalassessment andplanning III.Comprehensiveassessment ofrisks Creditrisk Riskconcentrations Riskdiversification Securitization Crossborderlending Operationalrisk Marketrisk Interestrateriskinthe bankingbook Liquidityrisk Otherrisks IV.Stresstesting V.Monitoringandreporting VI.Internalcontrolreview InteractionofICAAPwithSupervisory Review StatementofRegulatoryPrinciples CapitalrequirementsspecifiedintheCARguideline areregulatoryminimumsthatassumeaninstitutionhasaportfolio ofriskexposuresthatishighlygranularandwidelydiversified. Becauseminimumregulatorycapitalrequirementscontainrestrictive orsimplifyingassumptions,aninstitutionshouldnotrelyonly oncompliancewithregulatoryminimumswhenconductingitsownassessment oftheadequacyofitscapital. AthoroughandcomprehensiveICAAPisavitalcomponentofastrong riskmanagementprogram.TheICAAPshouldproducealevelofcapital adequatetosupportthenatureandlevelofaninstitution’srisk. Eachfederally-regulateddeposit-takinginstitutionisresponsible fordevelopingandimplementingitsownICAAPforthepurposeof settinginternalcapitaltargetsanddevelopingstrategiesforachieving thoseinternaltargetsthatareconsistentwithitsbusinessplans, riskprofileandoperatingenvironment. FromOSFI’sperspective,ICAAPsprovideadditionalinformation thatcanaidinassessinginherentriskandmaypointtotheneed foradditionalsupervisoryworkaspartofthenormalcourseSupervisory ReviewProcess.WhileOSFImakesuseofinformationgleanedfrom aninstitution’sICAAPtoassessthequalityofriskmanagement, OSFIdoesnotapproveaninstitution’sICAAP. ScopeoftheICAAP OSFIexpectsfederallyregulateddeposit-takinginstitutions, includingCanadiansubsidiariesofforeignbanks,toputintoplace anICAAPthatcoverstheconsolidatedoperationsfromthetoplevel regulatedentityinCanada.Theconsolidatedapproachmeansthat aformalICAAPisnotrequiredateverylegalentitybelowtheCanadian parentinstitution. AlthoughanICAAPshouldcovertheconsolidatedoperationsfrom thetoplevelregulatedentityinCanada,OSFIexpectsaninstitution’s capitalplanningtoconsidertherisksofitsforeignoperations andalsotheavailabilityofcapitalandassetsinCanadatoprotect Canadiandepositors. Canadiansubsidiariesofforeignbanksmayborrowfromconsolidated groupmethodologiesforassessingrisk.However,aforeignbank subsidiary’sICAAPshouldreflectitsowncircumstances,andgroup-wide dataandmethodologiesshouldbeappropriatelymodifiedtoyield internalcapitaltargetsandacapitalplanthatisrelevantto theforeignbanksubsidiary. ExpectationsforanInstitution’sICAAP ArigorousICAAPhassixmaincomponents: Seniormanagementoversight Soundcapitalassessmentandplanning Comprehensiveassessmentofrisks Stresstesting Monitoringandreporting Internalcontrolreview WhilethesefundamentalfeaturesofICAAParebroadlyprescribed, thereisnosingle‘correct’approach,andoneapproachdoesnot fitallinstitutions.Aninstitution’sICAAPshouldbeassimple orcomplexasneeded,andshouldreflecthowtheinstitutionis managedandorganizedinpractice.Itshouldnotbeestablished solelytofulfillaregulatoryrequirement. TheextentofformalizationandsophisticationofICAAPswill differ,dependingontheinstitution’scomplexity,rangeofbusiness activities,riskprofile,andoperatingenvironment. I.Seniormanagementoversight Senior managementisresponsibleforoverseeingthedesignandimplementationoftheinstitution’s ICAAP.Inordertoperformaneffectiveassessmentofitscapital adequacy,aninstitutionshouldhaveinplaceasoundriskmanagement process.Managementshouldunderstandthenatureandlevelofrisk takenbytheinstitutionandhowthisriskrelatestoadequatelevels ofcapital.Managementshouldalsoensurethattheformalityand sophisticationoftheriskmanagementprocessesareappropriate fortheriskprofileandbusinessplanoftheinstitution. Aspartofthestrategicplanningprocess,aninstitutionshould performananalysisofitscurrentandfuturecapitalrequirements inrelationtoitsstrategicobjectives.Thestrategicplanshould clearlydescribetheinstitution’scapitalneedsinrelationto, amongotherthings,anticipatedbalancesheetgrowthandacquisitions, theRiskAppetiteFrameworkFootnote2andaccesstoexternalcapitalresources. PleaserefertoOSFI’sCorporateGovernanceguidelineforOSFI’sexpectationsofinstitutionBoardsofDirectorsinregardstothemanagementofcapitalandliquidity. II.Soundcapitalassessmentandplanning Capitalplanningisacrucialelementinaninstitution’sabilitytoachieveitsdesiredstrategicobjectives.Asoundcapitalassessmentprocessshouldincludethefollowing elements: Aclearanddocumentedprocessforevaluatingrisksanddetermining whetherornotariskshouldresultinanexplicitamountofcapital beingheld.Footnote3 Policiesandproceduresdesignedtoensurethattheinstitution identifies,measuresandreportsallmaterialrisksrequiring capital Aprocessthatrelatescapitaltocurrentandanticipatedfuture levelsofriskinaccordancewiththeinstitution’sriskappetite Aprocessthatstatescapitaladequacygoalswithrespectto risk,takingaccountoftheinstitution’sstrategicfocusand businessplan Aprocessofinternalcontrols,reviewsandauditstoensure theintegrityoftheoverallriskmanagementprocess Mostinstitutionsconsiderseveralfactorsinrelatingcapital tothelevelofrisk,forexample: Acomparisonoftheirowncapitallevelswithregulatorystandards andwiththoseofindustrypeers Considerationofidentifiedriskconcentrationsincreditand otheractivities Theircurrentanddesiredcreditagencyratings,ifapplicable Potentialsevereadverseevents,basedonhistoricalexperiences, eitheroftheinstitutionitselforthemarketsinwhichtheinstitution conductsbusiness,aswellasnon-historicalscenarios Plannedchangesintheinstitution’sbusinessorstrategic plans,identifiedchangesinitsoperatingenvironment,andconsequential changesinitsriskprofile Institutionswithmorecomplexanddiverseriskprofileswill alsouseriskmodelingtechniquesandintegratedscenarioanalyses toestimatetherisksthattheymayincorporateintotheiroverall assessmentofcapitaladequacy.Quantifiableestimatesofriskused inthisassessmentshouldalsohaveabusinessuse(i.e.,should notbemadesolelyforuseinICAAP)andshouldbesubjecttovalidation. Aseconomiccapital(EC)modelsweredesignedasarelativemeasure ofrisktobeusedforperformancemeasurementandpricing,the assumptionsunderlyingthesemodelstypicallyholdundernormal conditionsandnotunderthestressedconditionsconsideredinICAAP. AlthoughECmodelsprovideusefulinputstoICAAP,ECisnotasubstitute forICAAP. Inevaluatingtheadequacyofcapitalrelativetoriskandin makingdecisionsontheappropriatelevelandstructureofcapital, smaller,lesscomplexinstitutionsmaycontinuetorelyheavily onwelldocumented,qualitativeconsiderations.Qualitativeconsiderations mayincludeimplicitorexplicitregulatoryandmarketexpectations, peergroupanalysis,andtheresultsofforward-lookingstress testsandsensitivityanalysesofthecomponentsofrisksthatshould becoveredbycapital.Forrisksthatcannotbedirectlyquantified (e.g.,reputationalrisk),allinstitutionsmayusewelldocumented, qualitativeconsiderations. Aneffectivecapitalplanningprocessrequiresaninstitution toassessboththeriskstowhichitisexposedandtheriskmanagement processesinplacetomanageandmitigatethoserisks;evaluate itscapitaladequacyrelativetoitsrisks;andconsiderthepotential impactonearningsandcapitalfrompotentialeconomicdownturns. Theinstitutionshouldidentifythetimehorizonoverwhichitis assessingcapitaladequacy.Itshouldevaluatewhetherlong-run capitaltargetsareconsistentwithshort-rungoals,basedoncurrent andplannedchangesinriskprofileandtherecognitionthataccommodating additionalcapitalneedscanrequiresignificantleadtime.Capital planningshouldfactorinthepotentialdifficultiesofraising additionalcapitalduringdownturnsorothertimesofstress. III.Comprehensiveassessmentofrisks TheICAAPshouldaddressallmaterialrisksfacedbytheinstitution astheyrelatetotheadequacyofcapital,includingallrisksexplicitly capturedinminimumregulatorycapitalrequirementsaswellasrisks thatarenotfullycapturedunderminimumregulatorycapitalrequirements. Thetechniquesusedinassessingmaterialrisksshouldbecommensurate withthescopeandcomplexityoftheinstitution’srisktakingactivities. Creditrisk Institutionsshouldhavemethodologiesthatenablethemtoassess thecreditriskinvolvedinindividualexposuresandattheportfolio level.Thecreditreviewassessmentofcapitaladequacyshouldcover fourareas: Riskratingsystems Portfolioanalysis/aggregation Largeexposuresandriskconcentrations Securitizationandcomplexstructuredinstruments(whererelevant) Thesophisticationofthemethodologiesusedtoquantifycredit riskshouldbeappropriatetothescopeandcomplexityoftheinstitution’s creditrisktakingactivities.Lesscomplexcreditrisktakingactivities mayincorporateavarietyofmethodologiesbutshouldatminimum takeintoconsideration: Historicallossexperience Forecastandpasteconomicconditions Attributesspecifictoadefinedgroupofborrowers Othercharacteristicsdirectlyaffectingthecollectability ofapoolorportfolioofloans InstitutionsshouldrefertoOSFI’sLargeExposureLimits guidelineandthe LargeExposureLimitsguidancenoteaswellasthe supportingBaselCommitteedocumentPrinciples fortheManagementofCreditRiskforfurtherguidance onexpectationsformanagingexposurestosingleborrowersorconnected entities. Riskconcentrations Theimpactofriskconcentrationsshouldbereflectedinaninstitution’s ICAAP.Typicalsituationsinwhichriskconcentrationscanarise includeexposuresto: asinglecounterparty,borrowerorgroupofconnectedcounterparties orborrowers industryoreconomicsectors,includingexposurestobothregulated andnonregulatedfinancialinstitutionssuchashedgefundsand privateequityfirms geographicalregions similarcollateraltypesortoasingleorcloselyrelated creditprotectionprovider,andotherexposuresarisingfromcredit riskmitigationtechniques tradingexposures/marketrisk Riskconcentrationscanalsoarisethroughacombinationofexposures acrossthesebroadcategories.Aninstitutionshouldhaveanunderstanding ofitsfirm-widecreditriskconcentrationsresultingfromsimilar exposuresacrossitsdifferentbusinesslines. Aninstitutionmayalsoincuraconcentrationtoaparticular assettypeindirectlythroughinvestmentsbackedbysuchassets (e.g.,collateraliseddebtobligations–CDOs),aswellasthrough collateralorguaranteesusedtomitigatecreditrisk.Institutions thatplacemorerelianceoncollateralvaluesthanonanevaluation ofaborrower’sorcounterparty’scapacitytoperformmayseethemselves exposedtounexpectedmarketriskinadditiontowrongwayrisk Footnote4,particularly wherethevalueofthecollateraldeclines. Aninstitutionshouldhaveinplaceadequate,systematicprocedures foridentifyinghighcorrelationbetweenthecreditworthinessof aprotectionproviderorcollateralandtheobligorsoftheunderlying exposuresduetotheirperformancebeingdependentoncommonfactors beyondsystemicrisk(i.e.“wrongwayrisk”). Riskdiversification Institutionsshouldexercisecautionwhenincludingriskdiversification benefitsinICAAP.Assumptionsondiversificationareoftenbased onexpertjudgementandaredifficulttovalidate.Institutions shouldbeconservativeintheirassessmentofdiversificationbenefits, inparticularbetweendifferentclassesofrisk,andshouldconsider whethersuchbenefitsexistunderstressedconditions. Securitization Wheresecuritizationactivities(e.g.,securitizationofown-assets forrisktransferand/orfunding;provisionofbackstopcreditfacilities tothird-partyconduits)arematerial,aninstitution’sICAAPneeds toconsidertherisksarisingfromoriginating,structuring,distributing and/orinvestinginsuchassets,includingrisksthatarefully capturedinminimumregulatorycapitalrequirements.Thesemayinclude, forexample,reputationalriskandtheprovisionofnon-contractual orimplicitsupporttosecuritizationvehicles.Assetperformance maycauseassetstoreturntothebalancesheetthroughamortization andrepurchase.Disruptionsinmarketdemandforasset-backedpaper mayleaveassetsinsecuritizationpipelinesonthebalancesheet orforcetheoriginatortosupportitsownpaper.Thesehaveadverse implicationsforcapitalandliquiditythatshouldbepartofthe institution’scapitalandliquidityplanning. Aninstitutionshoulddevelopprudentcontingencyplansspecifying howitwouldrespondtocapitalpressuresthatarisewhenaccess tosecuritizationmarketsisreduced.Thecontingencyplansshould alsoaddresshowtheinstitutionwouldaddressvaluationchallenges forpotentiallyilliquidpositionsheldforsaleorfortrading. Theriskmeasures,stresstestingresultsandcontingencyplans shouldbeincorporatedintothebanksriskmanagementprocesses anditsICAAPandshouldresultinanappropriatelevelofcapital underPillar2inexcessoftheminimumrequirementscommensurate withtheriskappetitestatement. InstitutionsshouldalsorefertoChapter7oftheCARguidelineforfurtherguidanceonsoundpracticeformanagingriskassociatedwithsecuritizationtransactions. Crossborderlending Institutionsthatengageincrossborderlendingaresubjectto increasedriskincludingcountryrisk,concentrationrisk,foreign currencyrisk(marketrisk)aswellasregulatory,legal,compliance andoperationalrisks,allofwhichshouldbereflectedintheICAAP. Lawsandregulators’actionsinforeignjurisdictionscouldmake itmuchmoredifficulttorealizeonassetsandsecurityinthe eventofadefault.Whereregulatory,legalandcompliancerisks associatedwithconcentrationsincrossborderlendingarenotconsidered elsewhereinaninstitution’sriskassessmentprocess;additional capitalmayberequiredforthistypeoflendinginaninstitution's ICAAP. Operationalrisk Similarrigourshouldbeappliedtothemanagementofoperational riskasisdoneforthemanagementofothersignificantbanking risks.Thefailuretoproperlymanageoperationalriskcanresult inamisstatementoftheinstitution’srisk/returnprofileandexpose theinstitutiontosignificantlosses. InstitutionsshouldrefertoOSFI’sguidelineB-21OperationalRiskManagementandtotheBaselCommittee’spaperPrinciplesfortheSoundManagementofOperationalRiskreleasedinJune2011whichdescribesasetofprinciplesformanagingoperationalrisk. Marketrisk Institutionsshouldhavemethodologiesthatenablethemtoassess andactivelymanageallmaterialmarketrisks,wherevertheyarise throughouttheinstitution(i.e.,position,tradingdesk,business lineorfirm-level). Formoresophisticatedinstitutions,theassessmentofinternal capitaladequacyformarketrisk,ataminimum,shouldbebased onbothvalue-at-risk(VaR)orsimilarmodellingandstresstesting, includinganassessmentofconcentrationriskandtheassessment ofilliquidityunderstressfulmarketscenarios. Aninstitution’sVaRmodelshouldbeadequatetoidentifyand measurerisksarisingfromallitstradingactivitiesandshould beintegratedintotheoverallinternalcapitalassessmentaswell assubjecttorigorousongoingvalidation.AVaRmodel’sestimates shouldbesensitivetochangesinthetradingbookriskprofile. Interestrateriskinthebankingbook TheICAAPshouldincludeallmaterialinterestrateriskpositions oftheinstitutionandconsiderallrelevantrepricingandmaturity data.Thesystemshouldhavewell-documentedassumptionsandtechniques. Aninstitutionshouldbeabletosupportitsassumptionsaboutthe behaviouralcharacteristicsofnon-maturitydepositsandotherassets andliabilities,especiallythoseexposurescharacterizedbyembedded optionality.Givenuncertaintyinsuchassumptions,stresstesting andscenarioanalysisshouldbeusedintheanalysisofinterest raterisks. Ingeneral,anincreaseinuncertaintyrelatedtomodelingand businesscomplexityshouldresultinmorecapitalbeingheld. InstitutionsshouldrefertoOSFI’sguidelineB-12,InterestRateRiskManagementand thesupportingBaselCommitteedocumentPrinciples fortheManagementandSupervisionofInterestRateRiskfor furtherconsiderationsrelevanttothemeasurementofinterestrate risk. Liquidityrisk Liquidityisvitaltotheongoingviabilityofanybankingorganization. Aninstitution’scapitalpositioncanhaveaneffectonitsability toobtainliquidity,especiallyinacrisis.Whereas,institutions arenotexpectedtoseparatelycapitalizetheirliquidityrisk, thestressscenariosfortargetcapitalplanningandliquidityrisk managementshouldbecomplementary.Institutionsshouldreferto OSFI’sguidelineB-6,LiquidityPrinciples,andthesupportingBaselCommittee documentPrinciples forSoundLiquidityRiskManagementandSupervision.Footnote5 Otherrisks Althoughriskssuchasstrategicandreputationriskarenoteasily measurable,institutionsareexpectedtodeveloptechniquesfor managingallaspectsoftheserisks.Reputationriskisakeyissue foranindustrythatreliesontheconfidenceofconsumers,creditors andthegeneralmarketplace.Forexample,whenaninstitutionacts asanadvisor,arrangesoractivelyparticipatesinfinancialtransactions, itmayassumeinsurance,market,credit,andoperationalrisks. Reputationriskoftenarisesbecauseofinadequatemanagementof theseotherrisks,whethertheyareassociatedwithdirectorindirect involvementinthesaleororiginationofcomplexfinancialtransactions orrelativelyroutineoperationalactivities. Reputationalriskcanleadtotheprovisionofimplicitsupport, whichmaygiverisetocredit,liquidity,marketandlegalrisk –allofwhichcanhaveanegativeimpactonaninstitution’searnings, liquidityandcapitalposition.Aninstitutionshouldidentifypotential sourcesofreputationalrisktowhichitisexposed.Thisincludes theinstitution’sbusinesslines,liabilities,affiliatedoperations, off-balancesheetvehiclesandmarketsinwhichitoperates.The risksthatariseshouldbeincorporatedintotheinstitution’srisk managementprocessandappropriatelyaddressedinitsICAAPand liquiditycontingencyplans. InstitutionsshouldrefertotheindustrynoticeOSFI’sReviewofReputationRiskPractices:Principles,ObservationsandNextStepsforafurtherdiscussionofreputationrisk. IV.Stresstesting Stresstestingisariskmanagementtechniqueusedtoevaluate thepotentialeffectsonaninstitution’sfinancialcondition,of asetofspecifiedchangesinriskfactors,correspondingtoexceptional butplausibleeventsFootnote6.Aninstitution’s capitalplanningprocessshouldincorporaterigorous,forward-looking stresstestingthatidentifiespossibleeventsorchangesinmarket conditionsthatcouldadverselyimpacttheinstitutions.Intheir ICAAPs,institutionsshouldexaminefuturecapitalresourcesand capitalrequirementsunderadversescenarios.Theresultsofforward-looking stresstestingshouldbeconsideredwhenevaluatingtheadequacy ofaninstitution’scapital. Forfurtherguidanceonstresstestingexpectations,institutions shouldrefertoguidelineE-18,StressTesting. V.Monitoringandreporting Theinstitutionshouldestablishanadequatesystemformonitoring andreportingriskexposuresandassessinghowchangestotheinstitution’s riskprofileaffectstheneedforcapital.Theinstitution’ssenior managementshouldreceiveregularreports ontheinstitution’sriskprofileandcapitalneeds.Thesereports shouldallowseniormanagementto: Evaluatethelevelandtrendofmaterialrisksandtheireffect oncapitallevels Evaluatethesensitivityandreasonablenessofassumptions usedinthecapitalassessmentmeasurementsystem Determinethattheinstitutionholdssufficientcapitalagainst thevariousrisksandisincompliancewithestablishedcapital adequacygoals Assessthefuturecapitalrequirementsbasedontheinstitution’s reportedriskprofileandmakenecessaryadjustmentstotheinstitution’s strategicplanaccordingly VI.Internalcontrolreview Theinstitution’sinternalcontrolstructureisessentialtothe capitalassessmentprocess.Effectivecontrolofthecapitalassessment processincludesanindependentreviewand,whereappropriate,the involvementofinternalandexternalaudits.Seniormanagementhasaresponsibilitytoensurethattheinstitutionestablishes asystemforassessingthevariousrisks,developsasystemtorelate risktotheinstitution’scapitallevel,andestablishesamethod formonitoringcompliancewithinternalpolicies. Theinstitutionshouldconductperiodicreviewsofitsriskmanagement processtoensureitsintegrity,accuracy,andreasonableness.Areas thatshouldbereviewedinclude: Appropriatenessoftheinstitution’scapitalassessmentprocess, giventhenature,scopeandcomplexityofitsactivities Identificationoflargeexposuresandriskconcentrations Accuracyandcompletenessofdatainputsintotheinstitution’s assessmentprocess Reasonablenessandvalidityofscenariosusedintheassessment process Stresstestingandanalysisofassumptionsandinputs InteractionofICAAPwithSupervisoryReview OSFIassessescapitaladequacyattwolevels.Aninstitutionmust havesufficientcapitaltomeetitstargetregulatoryrequirements (regulatorycapital),aswellassufficientcapitaltosupportits riskprofile,(i.e.,itsInherentRisksandOverallNetRisk(ONR))asdetermined throughtheOSFISupervisoryFramework.Footnote7 OSFI’sriskassessmentprocessbeginswithanevaluationofthe inherentriskwithineachsignificantactivityofafinancialinstitution. OSFIthenexaminesthequalityofriskmanagementappliedtomitigate theserisks.Consideringthisinformation,OSFIarrivesatanassessment ofboththelevelofnetriskofthesignificantactivityandthe directionofthenetrisk,i.e.,whetheritisdecreasing,stable orincreasing.Then,takingintoaccountthematerialityofeach ofthesignificantactivitiesofacompany,OSFIarrivesatanoverall netriskratinganditsdirection. OSFIthendevelopsacompositeriskrating(anddirection)for thefinancialinstitution,takingintoaccountbothourassessment oftheoverallnetrisk(whichincludesanassessmentoftheadequacy ofriskmanagementprocesses)andourassessmentoffinancialfactors, suchascapitalandearnings.Capitalcanbeassessedas“strong”, “acceptable”,“needsimprovement”or“weak”. Thedepthandfrequencyofsupervisoryreviewofaninstitution’s ICAAPwillbeproportionaltothenature,scaleandcomplexityof itsactivities,andtherisksposedtoOSFI’ssupervisoryobjectives withrespecttothesafetyandsoundnessoftheinstitution. Thedialoguebetween,ontheonehand,OSFI’sassessmentofinherent riskandONR,andtheinstitutions’ICAAPontheother,willembrace thefollowingfourelements: Element1:Thelevelofconservatismininternalestimates oftheriskscapturedintheCARguideline(credit, market,andoperationalrisk) Element2:MaterialrisksnotfullycapturedundertheCARguideline(forexample,concentrationrisk,thedegreeofconservatism ofestimatesusedbyinstitutionsapprovedforadvancedapproaches) Element3:MaterialrisksnotcoveredbyCAR(forexample, interestrateriskinthebankingbook,reputationrisk,strategic risk).Undercreditrisk,element3wouldincludeunderestimation ofcreditriskusingstandardisedapproachesandweaknessesin creditriskmitigation. Element4:Externalfactors,wherenotalreadyconsideredin thepreviouspoints,includingstresstestinginInternalRatings BasedApproaches,impactofeconomiccyclesandotherexternal risksandfactors OSFIexpectsthatcapitalassessmentwillnotbecomeaformula-driven processofadd-ons.Expertjudgementwillcontinuetobenecessary tooperationalizetheassessmentandquantificationofriskand integratethoseresultsintotheoverallassessmentofcapital. Initially,thisassessmentwilllikelyincludemeasuresofoutliers forriskconcentrationsandoutliersforinterestrateriskinthe bankingbook. Oncecapitalratingcriteriaaremorefullydevelopedandexperience isgainedfromareasonableperiodofimplementation,thesupervisory assessmentoftheinternaltargetcapitalforsomeinstitutions couldindicatethattheindustry-widetargetisconservativefor thatinstitutionornotconservativeenough.Thiswouldleadto discussionswiththeinstitutionaboutamoreappropriatelevel ofcapitalwithinthetargetcapitalframework. -END- Footnotes Footnote1 InternationalConvergenceofCapitalMeasurementandCapital Standards:aRevisedFramework,issuedbytheBaselCommittee onBankingSupervision,June2006 Returntofootnote1referrer Footnote2 RefertoOSFI’sCorporateGovernanceguidelineforadditionalguidanceinthisarea. Returntofootnote2referrer Footnote3 Notallriskscanbedirectlyquantifiedandcapitalized.Material risks,includingthosethataredifficulttoquantifyinan ICAAPframework,shouldbemitigatedbyinternalcontrolsand contingencyplans. Returntofootnote3referrer Footnote4 WrongwayriskisdefinedinChapter4oftheCARguideline: GeneralWrong-WayRiskariseswhenthe probabilityofdefaultofcounterpartiesispositivelycorrelated withgeneralmarketriskfactors. SpecificWrong-WayRiskariseswhenthe exposuretoaparticularcounterpartispositivelycorrelated withtheprobabilityofdefaultofthecounterpartydue tothenatureofthetransactionswiththecounterparty. Returntofootnote4referrer Footnote5 SeealsotheBaselCommittee’sDecember2009consultativepaper, International frameworkforliquidityriskmeasurement,standardsandmonitoring. Thisdocumentisexpectedtoresultinadditionalliquidity guidancewhichshouldalsobeconsidered. Returntofootnote5referrer Footnote6 StressTestingbyLargeFinancialInstitutions:Current PracticeandAggregationIssues,CommitteeontheGlobal FinancialSystem,April2000 Returntofootnote6referrer Footnote7 OtherdocumentsrelevanttoOSFI’sSupervisoryFrameworkcan beaccessedathttp://www.osfi-bsif.gc.ca/Eng/fi-if/rai-eri/sp-ps/Pages/default.aspx Returntofootnote7referrer ModifiedDate: 2018-09-18 Secondarymenu RegulationandGuidance ActsandRegulations Guidance TableofGuidelines TableofAdvisories ApprovalsandPrecedents ApplicationandApprovalGuides RegulatoryandLegislativeAdvisories LegislativeRulings CapitalRulings NameRequest RiskAssessmentandIntervention SupervisoryPractices GuidetoIntervention TrustAgreements RegulatoryData FilingCorporateReturns FilingFinancialReturns ViewingFinancialData Anti-moneyLaunderingandCompliance Anti-moneyLaundering Anti-terrorismFinancing Sanctions Messages IndustryNotices WebTools WhoWeRegulate