IMF published several technical notes under the Financial Sector Assessment Program (FSAP) on Canada. The technical notes cover various topics, including regulation and supervision of deposit-taking and insurance sector, bank resolution and crisis management, stress testing and financial stability analysis, systemic risk oversight and macro-prudential policy, oversight of financial market infrastructures and fintech development, and systemic liquidity. Additionally, IMF published its staff report and selected issues report under the 2019 Article IV consultation with Peru. While commending the authorities’ actions to strengthen financial-sector supervision, including through progress in implementing the 2018 FSAP recommendations, the IMF Directors encouraged further efforts to deepen the legislative and regulatory agenda.
The banking sector in Canada has enjoyed solid profitability and sizable capital buffers. The insurance sector has remained financially sound even in the low interest rate environment. Other non-bank sectors have grown considerably, with pension funds and mutual funds dominating the institutional and retail asset management landscape. Major deposit-taking institutions would be able to manage severe macro-financial shocks, but mortgage insurers would probably need additional capital. Large life insurers appear somewhat exposed to financial market stress and lower interest rates. The solvency of some major life insurers could be under pressure during severe financial market stress, largely due to the impact of widening credit spreads and falling equity prices. The report recommends that the top-down stress testing capacity for banks and insurers should be enhanced.
The FSAP conducted a focused review that primarily assessed the regulatory and supervisory frameworks through the lens of housing market-related risks. The review evaluated oversight of deposit-taking institutions and followed up on the main recommendations of the 2014 Basel Core Principles (BCP) for effective banking supervision assessment. The 2014 FSAP findings that OSFI’s supervision of banks is effective, with a high level of compliance with BCP, remain valid. A number of areas still fall short of full compliance with the BCP. These include an incomplete fit and proper process for new Board appointments (BCP 5) and limited monitoring of large exposures and related parties (BCPs 19 and 20). The FSAP also conducted a focused review on domestic systemically important financial market infrastructures. Canadian authorities have been proactive in monitoring fintech developments. Furthermore, the bank resolution regime and crisis management framework are the subjects of continuous improvements.
The assessment highlights that expected credit losses, under IFRS 9, may not be adequate from a prudential perspective, as they are based on contractual maturity and do not take into account the amortization period and possible related renewal risk; for this, a Pillar 2 add-on could be appropriate. For the life and health insurance, the OSFI and AMF, in preparation for IFRS 17, should carefully consider how risk margins interact with the regulatory solvency framework for life insurers. Implementation of Own Risk and Solvency Assessment (ORSA) is still developing. OSFI and AMF should work with the insurance industry to ensure that ORSA reflects appropriate considerations for risk diversification, risk sharing with life insurance policyholders, and risk appetite with respect to potential ratings downgrades.
Technical Notes on FSAP on Canada
- Regulation and Supervision of Deposit Takers
- Regulation and Supervision of Insurers
- Bank Resolution and Crisis Management
- Stress Testing and Financial Stability Analysis
- Systemic Risk Oversight and Macro-Prudential Policy
- Oversight of Market Infrastructure and Fintech
- Systemic Liquidity
- Housing Finance
Reports on Article IV Consultation with Peru
Keywords: Americas, Canada, Peru, Banking, Insurance, Stress Testing, Macro-Prudential Policy, FSAP, Systemic Risk, Article IV, IFRS 9, IFRS 17, ORSA, Resolution Framework, OSFI, AMF, IMF
Previous ArticleHKMA Updates Policy Module on Supervisory Review Process
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.
The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.
The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),
The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances
The U.S. Securities and Exchange Commission (SEC) looks set to intensify focus on crypto-assets and cyber risk and extended the comment period on the proposed rules to enhance and standardize climate-related disclosures for investors.
The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility and issued an update on the operational preparedness for zero and negative market interest rates.
The Commission for the Financial Market (CMF) in Chile published capital adequacy ratios (as of February 2022, January 2022, and December 2021) for 17 banks and for the banking system.
The Prudential Regulation Authority (PRA) issued a statement on the European Banking Authority (EBA) guidelines on management of non-performing exposures (NPEs) and forborne exposures.
The European Banking Authority (EBA) updated the implementing technical standards that specify the data collection for the 2023 supervisory benchmarking exercise in relation to the internal approaches used in market risk, credit risk, and IFRS 9 accounting.
The European Insurance and Occupational Pensions Authority (EIOPA) published a feedback statement on the responses received to the consultation on blockchain and smart contracts in insurance.