OSFI Supervisory Framework Flashcards
What does OSFI’s Supervisory Framework(SW) describe?
Describes principles, concepts, and core process OSFI uses to guide its supervision of federally regulated financial institutions (FRFI)
What 3 primary changes were addressed in the updated SW?
1 - Changes in nature of understanding risk and risk management
2 - Changes evolving in Canadian international standards
3 - Changes in FI
In terms of international expectations, what Principles has OSFI adopted for FRFI?
- Basel Committee on Banking Supervision’s “Core Principles for Effective Banking Supervision”
- International Association of Insurance Supervisors’ “Insurance Core Principles and Methodology”.
Why does OSFI rely on the work of others?
- Reduce scope of work
- Minimize duplication of effort
External sources of work potentially useful:
• Work of external auditor
• Work of AA
• Work of FRFI’s oversight functions: Risk Management, Compliance, Financial, Actuarial, Internal Audit, Board, SM
Other external sources include rating agencies, industry groups, domestic/international organizations, consultants.
Identify the Key principles of OSFI’s Framework
- Focus on material risks
- Forward-looking, early Intervention
- Sound predictive judgment
- Understanding the drivers of risk
- Differentiate inherent risks and risk management
- Dynamic adjustment
- Assessment of the whole Institution
Define Inherent risk
Define Material loss
Define Significant activity
Inherent risk: Probability of material loss due to exposure to, and uncertainty arising from, current and potential future events
Material loss: Loss or combination of losses that could impair adequacy of capital of a FRFI such that there is potential for loss to depositors or PH
Significant activity: is a LOB, unit or process that is fundamental to the FRFI’s business model and its ability to meet its overall business objectives. Judgment is used in selecting significant activities, and can be based on quantitative or qualitative reasons
Identify OSFI Main categories of risk.
What are the possible assessment rating levels assigned to each inherent risk category?
What kind of risk is not included separately, but is an important consequence of other category risks?
- Credit risk
- Market risk
- Insurance risk
- Operational risk
- Regulatory compliance risk
- Strategic risk
- (Reputational risk)
Low, Moderate(Average) , Above Average, and High
*** Probability of a material loss
When does Credit Risk arise?
Counterparty’s potential inability or unwillingness to fully meet contractual obligations.
Components include:
• Loan loss/principal risk
• Pre-settlement/replacement risk
• Settlement risk
Counterparties include:
• Issuers, Debtors, Borrowers, Brokers, PH, Re, Guarantors
When does Market Risk arise?
Potential changes in market rates, prices or liquidity in various markets such as interest rates, credit, foreign exchange, equities, and commodities
When does Insurance Risk?
Potential for claims or payouts to be made to PH or beneficiaries
Incl. uncertainties around ultimate amount of net CF from:
• Premiums, commissions, claims, payouts, settlement expenses
• Timing of receipt and payment of CF
• PH behaviour (e.g. lapses)
When does Operational Risk?
Potential problems due to:
• Inadequate/failed internal process, people and systems
• External events
• Includes legal risk, potential unfavourable legal proceedings
When does Regulatory Compliance Risk arise?
Potential of FRFI not complying with rules and regulations in its jurisdictions
When does Strategic Risk arise?
Inability to implement appropriate business plans and strategies, make decisions, allocate resources
Identify and describe the Levels of Quality of Risk Management (QRM)
1 - Operational Management
• Manages all activity’s inherent risks on a daily basis
• Identify potential loss and place adequate controls
2 - Oversight Functions(OF)
• Provide independent, enterprise-wide oversight of operational management
• OF in an FRFI: Risk Management, Compliance, Financial, Actuarial, Internal Audit, Board, SM
What Levels of assessments can be applied to operational management, OF, and overall rating?
What levels of Direction of Quality of OF are possible?
Strong, Acceptable, Needs Improvement, Weak
DQOF: Improving, Stable, Deteriorating
