August 08, 2009
Risk Management & Regulatory frameworks - The Canadian Loonie Way
I often refer to FSA, Fed Reserve, APRA, ECB, MAS in my blogs. During my ongoing research on next generation regulatory and supervision frameworks, I start to identify some of the leading economies where financial institutions managed their risks comparatively better. Canada, worlds second largest country by area is on the top of my list. In this blog I cover off some of the Risk management practices & the supervisory framework in Canada. A free spirited multi cultural country, C$1 and C$2 coins are referred fondly by its citizens as the loonie and twoonie respectively. The one dollar coin has a image of a Canadian Loon; the two dollar coin has an image of a polar bear.(thanks to Greg Keeling from BMO, Canada for his insights on the terms loonie & twoonie).
OSFI (Office of the Superintendent of Financial Institution) or BSIF(Bureau du surintendent des institutions financieres Canada) supervises all the Canadian financial institutions. Some of the differentiating factors and broader learnings and best practices from Canada being:
1. OSFIs razor sharp mandate & focus on Solvency vis-a-vis competitiveness of the financial sector
2. Gross Leverage ratio
3. Quality of Tier 1 capital
4. Treatment of High Loan to Value ratio
5. On-site supervision
6. Through the Cycle estimates under Pillar 2
1. OSFIs razor sharp mandate & focus on Solvency vis-à-vis competitiveness of the financial sector-OSFIs single point focus is on Solvency of its financial institutions. It is relatively less saddled with the financial sector competitiveness that other supervisors routinely are required to balance for their respective financial centres.
2. Gross Leverage ratio to limit Leverage- Many countries have woken up to the need for constraining bank leverages and the promise of a gross leverage ratio for banks to do this. Canada for a long time already has this in place through its maximum assets-to-capital multiple. OSFI has been using a leverage ratio, on top of risk based capital to ensure solvency even when risks are not measured with 100% accuracy.
3. Quality of Tier 1 capital-75% of Tier 1 capital has to be in common shares and targets of 7% Tier 1 and 10% total capital.
4. Treatment of High Loan to Value ratio-All high Loan to Value ratio loans need to be insured either by a government agency or agency with a government guarantee.
5. On-site supervision-High reliance on the robustness and rigor of the On-site supervision. Still regulatory mode and not light touch supervision as in other firms.
6. Inspirit adoption of Basel II by 2007 and special attention to Through the cycle PD estimates-Canadian banks were Basel II ready by 2007 and encouraged to adopt Basel II in spirit and not as a tick mark exercise. The local banks were able to avoid capital requirement spikes by developing through-the-cycle estimates of probability of default and other measures. This is particularly a key learning for those banks that experience capital requirements spike due to limitations of their approach that was focused on Point in-time PD estimates. This can make system less pro-cyclical and or more counter- cyclical.
7. Some of the other areas where OSFI is taking a lead are-Loan Loss Provisioning, Compensation, Constitution of Risk experienced/aware Boards members, Macroprudential Monitoring, Macroprudential Calibration of Policy Tools, Liquidity, management, Capital rules specific to securitization and counterparty risk.
OSFIs top priorities in 2008-2011 are:
A. Enhanced Identification of Emerging Risks
B. Institutional and Market Resilience
C. Changes to International Financial Reporting Standards(IFRS)
D. Minimum Continuing Capital Surplus Requirement (MCCSR)
E. Financial Sector Assessment Program (FSAP)/Financial Action Task Force (FATF)Reviews
F. Basel II Capital Accord – Post- Implementation phase
G. People Identify changing human resources requirements
H. Pensions Systems and Processes
Sources: www.osfi-bsif.gc.ca; OSFI 2008-2011 Plan & Priorities; Julie Dickson, Superintendent, OSFI speech at Asian Banker 2009, Risk Magazine
Posted by spachava at 06:17 AM
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