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January 17, 2018

OSFI issued a letter that provides feedback on the 2016-17 Internal Capital Adequacy Assessment Process (ICAAP) Submission. The letter also states that a formal ICAAP submission to OSFI is not required for 2018. The letter is addressed to deposit-taking institutions that are using the Basel standardized approach to credit risk.

Based on the review of the ICAAP assessments submitted in December 2016, OSFI identified a number of key themes:

  • Real Estate Downturn Stress Test. Results of the required real estate stress test varied, given the different methodologies and assumptions used by each institution. A number of standardized deposit-taking institutions reported immaterial real estate downturn impact relative to their uninsured mortgage portfolio. OSFI encourages institutions to reassess their results for reasonability, given the nature of their respective portfolio and the overall impact on the level of impaired loans that would likely accompany a severe real estate downturn.
  • Assessment and Documentation of Risks. A number of ICAAPs did not provide sufficient detail on the risk assessment and quantification used to determine the internal capital target. Furthermore, rationale was not always provided in cases where the impact of stress test results was not factored into capital allocation.
  • Determination of Internal Capital Target. OSFI continues to observe misalignment of board-approved capital targets and ICAAP capital requirements for some standardized deposit-taking institutions.

OSFI expects that, in 2018, standardized deposit-taking institutions will update their ICAAP as part of their annual planning process, to assist the capital planning process, including the re-confirmation of internal capital targets. Furthermore, Lead Supervisors may request to review the ICAAP of an institution, as part of the ongoing supervisory process. Further communication will be sent to the industry in late 2018, providing more guidance on the next ICAAP submission as well as OSFI’s expectations of internal audit coverage for ICAAP and Basel Capital Adequacy Reporting (BCAR). OSFI has been informing standardized deposit-taking institutions of its expectations with respect to the Pillar 2 implementation, the submission requirements of ICAAP, and the expectations for internal audits of both the ICAAP and BCAR submissions. OSFI has received six rounds of ICAAP submissions to date.

Related Link: OSFI Letter

Keywords: Americas, Canada, ICAAP, BCAR, Pillar 2, Basel III, Stress Testing, OSFI

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