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Exam 6C (Fall 2018) > A - OSFI Supervisory Framework > Flashcards

A - OSFI Supervisory Framework Flashcards

1
Q

OSFI SUPERVISORY FRAMEWORK

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

A

–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
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2
Q

OSFI SUPERVISORY FRAMEWORK

Other sources of supervisory standards used by OSFI

A
  • BASEL’s Core Principles for Effective BANKING Supervision

- IAIS INSURANCE Core Principles and Methodology

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3
Q

OSFI SUPERVISORY FRAMEWORK

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

A

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

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4
Q

OSFI SUPERVISORY FRAMEWORK

7 key principles of OSFIs Risk Assessment of FRFIs

A

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)

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5
Q

OSFI SUPERVISORY FRAMEWORK

Define
INHERENT RISK.

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

A

—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

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6
Q

OSFI SUPERVISORY FRAMEWORK

6 categories of INHERENT risk

A

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

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

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7
Q

OSFI SUPERVISORY FRAMEWORK

Define SIGNIFICANT ACTIVITY

A

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

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8
Q

OSFI SUPERVISORY FRAMEWORK

Describe
REPUTATIONAL RISK

A

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

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9
Q

OSFI SUPERVISORY FRAMEWORK

Describe
CREDIT RISK
as an inherent risk

A

risk from 2nd party inability to meet obligations

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10
Q

OSFI SUPERVISORY FRAMEWORK

Describe
MARKET RISK
as an inherent risk

A

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

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11
Q

OSFI SUPERVISORY FRAMEWORK

Describe
INSURANCE RISK
as an inherent risk

A

risk from claims to policyholders

includes uncertainties around:

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

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12
Q

OSFI SUPERVISORY FRAMEWORK

Describe
OPERATIONAL RISK
as an inherent risk

A

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

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13
Q

OSFI SUPERVISORY FRAMEWORK

Describe
REGULATORY COMPLIANCE RISK
as an inherent risk

A

risk from non compliance with laws and regulations

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14
Q

OSFI SUPERVISORY FRAMEWORK

Describe
STRATEGIC RISK
as an inherent risk

A

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

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15
Q

OSFI SUPERVISORY FRAMEWORK

8 Management Categories (including 7 Oversight Functions)

A

-Operational Management

OVERSIGHT FUNCTIONS

  • Financial
  • Actuarial
  • Risk Management
  • Internal Audit
  • Compliance
  • Senior Management
  • Board
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16
Q

OSFI SUPERVISORY FRAMEWORK

Responsibility of
OPERATIONAL MANAGEMENT
as a Management Category

A

manage day-to-day operations

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

17
Q

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
FINANCIAL
as an OVERSIGHT FUNCTION

A
  • financial analysis of business lines and units
  • financial reporting
  • report to Board and Senior Management
18
Q

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
ACTUARIAL
as an OVERSIGHT FUNCTION

A
  • Pricing
  • Policy Liability Valuation
  • Reinsurance
  • Capital Adequacy
  • report to Board and Senior Management
19
Q

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
COMPLIANCE
as an OVERSIGHT FUNCTION

A
  • Set procedures to ensure adherence to regulations
  • Monitor Compliance with these
  • report to Board and Senior Management
20
Q

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
RISK MANAGEMENT
as an OVERSIGHT FUNCTION

A
  • identify enterprise-wide risks
  • develop models to measure risks
  • establish procedures to manage risks
  • develop risk metrics
  • report to Board and Senior Management
21
Q

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
INTERNAL AUDIT
as an OVERSIGHT FUNCTION

A

TRUC : penser à l’équipe BOC

-assess effectiveness of operational controls and oversight

22
Q

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
SENIOR MANAGEMENT
as an OVERSIGHT FUNCTION

A

-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

23
Q

OSFI SUPERVISORY FRAMEWORK

Responsibilities of
BOARD
as an OVERSIGHT FUNCTION

A
  • 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
24
Q

OSFI SUPERVISORY FRAMEWORK

Contrast
OPERATIONAL MANAGEMENT and OVERSIGHT FUNCTION.

A

—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

25
Q

OSFI SUPERVISORY FRAMEWORK

5 elements on which intensity of supervision depends

A 
nature
size
complexity
risk profile
potential consequences of failure
26
Q

OSFI SUPERVISORY FRAMEWORK

Define NET RISK

A

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

27
Q

OSFI SUPERVISORY FRAMEWORK

3 elements on which EARNINGS are assessed
2 elements on which CAPITAL is assessed
2 elements on which LIQUIDITY is assessed

A

—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

28
Q

OSFI SUPERVISORY FRAMEWORK

What is Composite Risk Rating

How is CRR used?

A

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

29
Q

OSFI SUPERVISORY FRAMEWORK

3 qualities of this Process

A

-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

30
Q

OSFI SUPERVISORY FRAMEWORK

Define
OVERALL NET RISK

A

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

31
Q

OSFI SUPERVISORY FRAMEWORK

Define LIQUIDITY RISK

A

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

Exam 6C (Fall 2018) (53 decks)

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