OSFI.SupFrm

Question 1

Main responsibility of OSFI relationship manager

Answer 1

Main point of contact between FRFI and OSFI
- responsible for maintaining an up-to-date risk assessment of the FRFI

Recall:
- FRFI = federally regulated financial institution
- OSFI = Office of the Superintendent of Financial Institutions

Question 2

What will the intensity of supervision will depend on?

Answer 2

The nature, size, complexity and risk profile of a FRFI

Question 3

Identify the 7 key principles of risk assessment by OSFI when supervising FRFIs

Answer 3

1. Focus on material risks
2. Should be forward looking & allow for early intervention
3. Should use sound predictive judgment
4. Should understand the risk drivers
5. Should differentiate between inherent risks & management of those risks
6. Dynamic adjustment
7. Should assess whole institution and not only a certain part of the company

Question 4

Identify the 9 primary concepts used by OSFI to enable a common approach to risk assessment across FRFIs over time

Answer 4

1. Significant activities
2. Inherent risk
3. Quality of risk management
4. NR (Net risk)
5. Importance & ONR (Overall Net Risk)
6. Earnings
7. Capital
8. Liquidity
9. Risk matrix & CRR (Composite Risk Rating)

Question 5

Describe - significant activities

Answer 5

• Anything that is fundamental to the business model (LOB, unit, process, etc.)
• It’s the fundamental risk assessment concept within the supervisory framework

Question 6

Identify the two controls regarding - quality of risk management & briefly describe the primary responsibility of each level of control

Answer 6

Two controls:

Control 1: Operational management (day-to-day control of significant activities)
- Essentially manage the day-to-day operations to insure risks are managed

Control 2: Oversight Functions of finance, compliance, actuarial)
- Independent, entreprise-wide oversight of operational management & assessment of risks that are that at that level

Question 7

Describe - NR (Net Risk)

Answer 7

Net risk of significant activity = judgment on inherent risk & quality of risk management
- Can be low, moderate, above average, high & trend over time

Question 8

Describe - Risk matrix, CRR (Composite Risk Rating)

Answer 8

RISK MATRIX: records assessment of significant activities and risks
CRR: culmination assessment (can be low, moderate, above average, high)

Question 9

Identify the 4 ratings possible of earnings/capital/liquidity, along with the 3 directions possible of earnings/capital/liquidity

Answer 9

Ratings: Strong, acceptable, needs improvement, weak
Direction: Improving, stable, deteriorating

Question 10

Identify the 3 steps in OSFI’s core supervisory process of the risk assessment of FRFIs & describe them

Answer 10

1. Planning Supervisory Work
   - Prepared annually, intensity of supervisory work depends on the nature, size, complexity and risk profile of the FRFI
   - Is the basis of a more detailed plan.
   - OSFI planning also includes a process to compare work efforts across FRFIs, to have broader standards, and to allocate appropriate resources to high-risk FRFIs
2. Executing Supervisory Work and Updating the Risk Profile
   - Continuum of supervisory work: monitoring, limited off-site reviews, extensive on-site reviews, testing or sampling if necessary
   - Scan environment (economic, social, political) -> scan industry (competition, customers, technology, etc.) -> scan FRFIs business profile (business model, objectives & strategies, organization) -> identification of emerging issues
3. Reporting & Intervention
   - Ongoing discussions & also formal, written reports
   - Supervisory letter is primary written communication to FRFI (includes key findings & recommendations)

Question 11

Fundamental concept in OSFI’s supervision of risk assessment

Answer 11

Significant activites

Question 12

OSFI’s steps (4)

Answer 12

Step 1: Identify significant activities
Step 2: Assess inherent risks and quality of risk management
Step 3: Calculate NR (Net Risk) for each significant activity using Appendix C
Step 4: Use risk matrix to assess intervention status and CRR (Composite Risk Rating) - Appendices D & E

Question 13

If inherent risk = above average & quality of risk management = needs improvement
Determine NET RISK ASSESSMENT

Answer 13

High (see Appendix C for table)