C - OSFI Corporate Governance

Question 1

OSFI CORPORATE GOVERNANCE

5 Factors making Financial Institutions different from other businesses (which has led to higher levels of regulations)

Answer 1

• EFFECTIVENESS OF ECONOMY DEPENDS ON THEM (failure of a Financial Institution has much more impact on public the non-financial business)
• MORE VULNERABLE TO UNEXPECTED ADVERSE EVENTS (due to their high debt-to-equity ratio)
• BIG LIQUIDITY PROBLEM IF CUSTOMERS LOSE CONFIDENCE IN THEM
• VALUE OF THEIR A/Ls MORE VOLATILE SO DIFFICULT TO PRICE ACCURATELY
• CAN HAVE LARGE MISMATCHES BETWEEN TERMS OF ASSETS vs LIABILITIES, RESULTING IN INVESTMENT RISK

Question 2

OSFI CORPORATE GOVERNANCE

3 items that should be contained in a Risk Appetite Framework.

Describe them.

Answer 2

A RISK APPETITE “STATEMENT”

• reflect Aggregate level of risk
• type of risks company is willing to accept to achieve business objectives
• linked to strategic plan
• Include qualitative measures of
• -significant risk the firm want to TAKE or AVOID
• -attitude towards regulatory compliance
• Include quantitative measures of loss events (earnings, capital, liquidity) that cie is willing to accept
• Be forward looking
• Consider normal and stressed scenarios

RISK LIMITS
-Is the quantitative allocation of risk appetite by
§ Risk categories (credit, market, liquidity, operational, insurance)
§ Business units
§ LoBs
–be specific, measurable, frequency-based and reportable

OUTLINE OF THE ROLES AND RESPONSIBILITIES of those overseeing the implementation of the framework

Question 3

OSFI CORPORATE GOVERNANCE

3 examples of controls to ensure on-going operational compliance with the Risk Appetite Framework

Answer 3

• 1- CRO should ensure aggregate risk limits are consistent with RISK APPETITE
• 2- CRO should include in regular reports to Board and Sr Management an assessment against RISK APPETITE and RISK LIMITS.
• 3- Internal Audit should assess compliance with the Risk Appetite framework in its review of units within FRFI