Deposit-taking Regulation and Supervision

 Deposit-taking Regulation and Supervision
59. OSFI’s banking supervision remains effective with a high level of compliance with the
Basel Core Principles for Effective Banking Supervision (BCP). OSFI takes a conservative, riskbased approach to supervision that reflects the nature, size, complexity and risk profile of
institutions. Its supervisory approach is well-structured and forward-looking, has solid foundation for
consolidated and cross-border supervision, and appears adaptive to changing conditions. In
addition to its close collaboration with relevant foreign supervisors, OSFI regularly conducts on-site
inspections of significant overseas operations. OSFI’s primary focus on consolidated supervision
should be complemented by better monitoring material licensed entities’ credit and liquidity risks.
Furthermore, OSFI emphasizes the accountability of the board and management for the overall
soundness of institutions. However, its informal approach that expects institutions to keep OSFI
informed whenever issues arise may not work well when the system comes under stress. 

60. AMF is able to maintain high regulatory and supervisory standards, but FICOM has
struggled to perform its role effectively. AMF adheres to the BCP and aligns its regulatory
framework with the federal regime to ensure a level-playing field. The dominance of Qu├ębec’s D-SIFI
limits AMF’s benchmarking ability. FICOM lacks operational independence and sufficient resources.
While its supervisory practices are sound, FICOM has not been able to introduce formal Basel III
requirements. The proposed legislative change (paragraph 55) would help address these
61. Aspects of the regulatory and supervisory frameworks for credit risk, particularly
related to real estate exposures, should be enhanced. Risk weights for insured mortgage
exposures seem too low and do not account for important exclusions—e.g., earthquake damages—

 from insurance coverage. Standardized risk weights are zero, while most major banks’ internal
ratings-based models using the probability of default (PD) substitution approach do not properly
account for these exclusions. The loss given default (LGD) adjustment approach is more appropriate.
Pillar 2 capital-add on could be considered to support more prudent credit loss provisioning given
that expected life-time credit losses for mortgages (per IFRS 9) are based on contractual maturity
rather than amortization period.10 A common framework to monitor forborne exposures (e.g.,
definition and regulatory reporting)—aligned with the BCBS’s guidance—should be adopted across
all jurisdictions in Canada. This will help improve risk monitoring given the importance of debt
restructuring for managing problem real estate exposures.
62. Other regulatory shortcomings should also be addressed. Regarding liquidity risk, the
LCR frameworks should be reviewed to appropriately reflect roll-over of maturing mortgages,11 and
OSFI’s guideline on asset pledging should ensure sufficient unencumbered assets to support the
claim of depositors. The frameworks around significant influence, large exposures and related
parties (mostly their definitions) needs to be strengthened.
Insurance Regulation and Supervision
63. Insurance supervision at OSFI and AMF is high-quality, in line with the Insurance Core
Principles (ICP). Both employ a risk-based supervisory approach that is well-structured to escalate
supervisory intensity commensurate with firms’ risk profiles. A joint OSFI-AMF benchmarking
exercise can help ensure the consistency of supervisory intensity between the two major supervisors
10 Assuming amortization period instead, additional credit-related impairments would reduce the CET1 capital ratio
by 26 basis points in the adverse scenario.
11 Assuming a complete renewal of credit facilities in the retail segment, the LCRs of D-SIFIs would drop by few
percentage points.
in Canada. In preparation for the new accounting standards (IFRS 17), OSFI and AMF should carefully
consider how risk margins interact with the regulatory solvency framework for life insurers.

. Group-wide supervision needs improvement in legal foundation and consistency of
application. With no legal powers over unregulated holding companies, both OSFI and AMF rely on
voluntary agreements with the companies (i.e., undertakings) to be able to obtain information and
apply prudential requirements for the insurance groups. For life insurance, OSFI should discourage
holding companies from issuing senior debt and passing such proceeds to operating entities to be
used as available capital; this issue arises due to different capital requirements between
consolidated insurance groups and operating entities.
65. A greater emphasis on solo supervision would be beneficial, enabling Canada-wide
surveillance of the insurance industry. OSFI and AMF focus on comprehensive consolidated
supervision that accounts for significant activities both in Canada and abroad. For the three largest
life insurers, OSFI has regularly engaged with relevant foreign supervisors and conducted on-site
inspections of international businesses. Given the life insurance market structure, capital and
disclosure requirements at the solo level could be useful.

 Canada-wide surveillance, currently
missing, will enhance risk monitoring and identification.
66. Conduct oversight has improved, but property and casualty insurance exhibits certain
issues that should be addressed. Regarding conduct oversight, the creation of Ontario’s FSRA
appears to address many recommendations of the 2014 FSAP’s ICP assessment. Ongoing federalprovincial work should continue to address potential systemic risk arising from earthquakes.
Regarding the auto insurance industry, it is important to strike a right balance among ensuring
insurance affordability, providing sufficient compensations to accident victims and maintaining
prudentially sound insurers.

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