A - OSFI Supervisory Framework

Question 1

OSFI SUPERVISORY FRAMEWORK

PRIMARY GOAL, FOCUS, and 3 ROLES of OSFI’s supervision of FRFIs

Answer 1

–primary goal–
PROTECT DEPOSITORS and POLICYHOLDERS from LOSS

–focus–
DETERMINE IMPACT of CURRENT and FUTURE EVENTS on RISK PROFILE

• -3 roles–
• ASSESS SAFETY and SOUNDNESS of financial system
• PROVIDE FEEDBACK
• INTERVENE WHEN NECESSARY

Question 2

OSFI SUPERVISORY FRAMEWORK

Other sources of supervisory standards used by OSFI

Answer 2

• BASEL’s Core Principles for Effective BANKING Supervision

- IAIS INSURANCE Core Principles and Methodology

Question 3

OSFI SUPERVISORY FRAMEWORK

8 elements the GENERAL APPROACH
of osfi’s supervision of FRFIs

Answer 3

1) Supervision on a CONSOLIDATED BASIS
2) osfi nominates RELATIONSHIP MANAGER (RM) for FRFI to maintain up-to-date its risk assessment (updating risk profile),
RM is main point of contact between osfi and FRFI
3) Supervision is PRINCIPLES-BASED
4) Supervision INTENSITY and INTERVENTION
–INTENSITY depends on size, nature, risk profile and potential consequence of failure.
–Degree of INTERVENTION commensurate with risk assessment.
5) BOARD AND SR MANAGEMENT are ULTIMATELY ACCOUNTABLE for safety and soundness and compliance to law, must be proactive in communicating issues with osfi
6) RISK TOLERANCE
–FRFI needs to take reasonable risks, and osfi supervision will reduce likelihood of failure.
7) RELIES ON EXTERNAL AUDITORS for fairness of financial statements
8) RELIES ON WORK OF OTHERS to increase efficiency

Question 4

OSFI SUPERVISORY FRAMEWORK

7 key principles of OSFIs Risk Assessment of FRFIs

Answer 4

1) Focus on MATERIAL RISK
2) FORWARD-LOOKING, EARLY INTERVENTION
3) SOUND PREDICTIVE JUDGMENT with supported rationale
4) UNDERSTAND DRIVERS OF MATERIAL RISK
5) DIFFERENTIATE INHERENT RISKS and RISK MANAGEMENT
6) DYNAMIC Adjustments
7) ASSESS THE WHOLE INSTITUTION (earnings, capital, liquidity)

Question 5

OSFI SUPERVISORY FRAMEWORK

Define
INHERENT RISK.

Define
MATERIAL LOSS.
(in OSFI’s supervisory framework)

Answer 5

—inherent risk —
P ( MATERIAL LOSS )
due to exposure to, and uncertainty from
CURRENT and POTENTIAL FUTURE events

—material loss —
losses that could impair ADEQUACY OF CAPITAL causing potential loss to depositors and policyholders

Question 6

OSFI SUPERVISORY FRAMEWORK

6 categories of INHERENT risk

Answer 6

Trucs : M-I-C-R-O-S

1) Market
2) Insurance
3) Credit
4) Regulatory compliance
5) Operational
6) Strategic

Question 7

OSFI SUPERVISORY FRAMEWORK

Define SIGNIFICANT ACTIVITY

Answer 7

LoB, UNIT or PROCESS
fundamental to business model
and
to ability to meet business objectives

Question 8

OSFI SUPERVISORY FRAMEWORK

Describe
REPUTATIONAL RISK

Answer 8

not a category of inherent risk, but a consideration in assessment of each category of inherent risk.

Question 9

OSFI SUPERVISORY FRAMEWORK

Describe
CREDIT RISK
as an inherent risk

Answer 9

risk from 2nd party inability to meet obligations

Question 10

OSFI SUPERVISORY FRAMEWORK

Describe
MARKET RISK
as an inherent risk

Answer 10

risk from change in market rates, prices or liquidity from (IR, Credit, FX, EQ, CO)

Question 11

OSFI SUPERVISORY FRAMEWORK

Describe
INSURANCE RISK
as an inherent risk

Answer 11

risk from claims to policyholders

includes uncertainties around:

1) ultimate amounts of CFs
2) timing of CFs
3) policyholder behaviors

Question 12

OSFI SUPERVISORY FRAMEWORK

Describe
OPERATIONAL RISK
as an inherent risk

Answer 12

risk due to inadequate or failed internal processes, people and system, or from external events.
it includes legal risk.

Question 13

OSFI SUPERVISORY FRAMEWORK

Describe
REGULATORY COMPLIANCE RISK
as an inherent risk

Answer 13

risk from non compliance with laws and regulations

Question 14

OSFI SUPERVISORY FRAMEWORK

Describe
STRATEGIC RISK
as an inherent risk

Answer 14

risk from inability to implement business plan and strategies, make decisions.

Question 15

OSFI SUPERVISORY FRAMEWORK

8 Management Categories (including 7 Oversight Functions)

Answer 15

-Operational Management

OVERSIGHT FUNCTIONS

• Financial
• Actuarial
• Risk Management
• Internal Audit
• Compliance
• Senior Management
• Board

Question 16

OSFI SUPERVISORY FRAMEWORK

Responsibility of
OPERATIONAL MANAGEMENT
as a Management Category

Answer 16

manage day-to-day operations

responsible for CONTROLS to manage INHERENT RISK on a DAY-TO-DAY basis.

Question 17

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
FINANCIAL
as an OVERSIGHT FUNCTION

Answer 17

• financial analysis of business lines and units
• financial reporting
• report to Board and Senior Management

Question 18

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
ACTUARIAL
as an OVERSIGHT FUNCTION

Answer 18

• Pricing
• Policy Liability Valuation
• Reinsurance
• Capital Adequacy
• report to Board and Senior Management

Question 19

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
COMPLIANCE
as an OVERSIGHT FUNCTION

Answer 19

• Set procedures to ensure adherence to regulations
• Monitor Compliance with these
• report to Board and Senior Management

Question 20

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
RISK MANAGEMENT
as an OVERSIGHT FUNCTION

Answer 20

• identify enterprise-wide risks
• develop models to measure risks
• establish procedures to manage risks
• develop risk metrics
• report to Board and Senior Management

Question 21

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
INTERNAL AUDIT
as an OVERSIGHT FUNCTION

Answer 21

TRUC : penser à l’équipe BOC

-assess effectiveness of operational controls and oversight

Question 22

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
SENIOR MANAGEMENT
as an OVERSIGHT FUNCTION

Answer 22

-develop, execute and monitor BUSINESS MODEL
(objectives, strategies, plans, org structures, controls)
-develop sound governance practices
-align employee compensation with long term interests
-keep Board well informed

Question 23

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
BOARD
as an OVERSIGHT FUNCTION

Answer 23

• APPROVE :
• -BUSINESS MODEL
• -RISK APPETITE and RISK TOLERANCE
• -CONTROLS
• -compensation is aligned with long term interest of company

-PROVIDE INDEPENDENT ASSESSMENT OF MANAGEMENT CONTROLS

• ensure Sr. Mngmnt is competent
• ensure risk are identified and managed correctly

Question 24

OSFI SUPERVISORY FRAMEWORK

Contrast
OPERATIONAL MANAGEMENT and OVERSIGHT FUNCTION.

Answer 24

—Operational Management—
responsible for CONTROLS to manage INHERENT RISK on a DAY-TO-DAY basis

—Oversight Function—
responsible to provide INDEPENDENT, ENTERPRISE-WIDE OVERSIGHT of OPERATIONAL MANAGEMENT

Question 25

OSFI SUPERVISORY FRAMEWORK 5 elements on which intensity of supervision depends

Answer 25

``` nature size complexity risk profile potential consequences of failure ```

Question 26

OSFI SUPERVISORY FRAMEWORK Define NET RISK

Answer 26

INHERENT RISK(s) after mitigation by QRM (Quality of Risk Management)

Question 27

OSFI SUPERVISORY FRAMEWORK 3 elements on which EARNINGS are assessed 2 elements on which CAPITAL is assessed 2 elements on which LIQUIDITY is assessed

Answer 27

---earning--- QUALITY QUANTITY CONSISTENCY present and prospectively, under normal and stressed situations ---capital--- QUALITY LEVEL APPROPRIATENESS present and prospectively, under normal and stressed situations, given the Overall Net Risk ---liquidity--- LEVEL OF LIQUIDITY RISK depends on balance sheet composition, funding sources, liquidity strategy, market conditions, events QUALITY OF LIQUIDITY MANAGEMENT present and prospectively, under normal and stressed situations

Question 28

OSFI SUPERVISORY FRAMEWORK What is Composite Risk Rating How is CRR used?

Answer 28

CRR : assessment of RISK PROFILE after considering EARNINGS, CAPITAL, LIQUIDITY and OVERALL NET RISK. It is OSFI's assessment of SAFETY and SOUNDNESS for depositors and policyholders Used to determine the stage of intervention

Question 29

OSFI SUPERVISORY FRAMEWORK 3 iterative steps of OSFI's Core Supervisory Process ----- 3 qualities of this Process

Answer 29

-1- PLANNING Supervision (annual review of strategy for 3 years, for each significant activity and oversight functions) -2- EXECUTING Supervision and UPDATING THE RISK PROFILE (monitoring, on-site, off-site reviews, during which RM updates Overall Risk Profile -3- REPORTING and INTERVENTION (RM annually writes a Supervisory Letter to FRFI, summarizing key findings, recommendations, and CRR) ----- Dynamic, Iterative and Continuous

Question 30

OSFI SUPERVISORY FRAMEWORK Define OVERALL NET RISK

Answer 30

ASSESSMENT of the potential adverse impact that all significant activities could have on EARNINGS and CAPITAL ADEQUACY

Question 31

OSFI SUPERVISORY FRAMEWORK Define LIQUIDITY RISK

Answer 31

risk from potential inability to obtain necessary funds to meet on and off balance sheet obligations as they come due.