OSFI published an implementation note that outlines the key principles and processes for the assessment of internal models used for regulatory capital calculations (capital models), in alignment with the Capital Adequacy Requirements (CAR) Guideline. These capital models relate to the measurement of credit, market, and counterparty credit risks for calculating minimum regulatory capital requirements. The Capital Model Assessment Program (CMAP) applies to all deposit-taking institutions intending to use new capital models or intending to implement the modifications to the previously approved capital models.
Under Chapter 1 of the CAR Guideline, institutions are required to obtain approval from OSFI prior to the use of advanced approaches for regulatory capital. The assessment of these capital models is governed by the CMAP for any primary and sub-risk factor eligible for the internal model regime. Out of the primary risk factors, the internal ratings-based (IRB) approach is applicable for credit risk and the internal model approach (IMA) is applicable for market risk. Additionally, counterparty credit risk is considered a sub-risk factor and is eligible for the Internal Model Method (IMM). The CMAP framework defines acceptance standards that are designed to help an institution establish a model that meets the minimum regulatory requirements at the onset of an OSFI approval and on an ongoing basis.
The implementation note describes the CMAP applicable to both, the new applicants and the accredited institutions. Once an institution is accredited, the CMAP covers entirety of the capital model lifecycle from the assessment of new model applications to any subsequent modifications, performance monitoring, periodic ongoing compliance reviews, and model decertification. According to this implementation note, applications are only required from institutions to OSFI for new models, material modifications, and acquisitions. Post-implementation reviews are outside the scope of this implementation note and managed through customary supervisory processes. Once an institution achieves accreditation, it is expected to maintain robust controls to ensure ongoing compliance with requirements of the CAR Guideline, relevant implementation notes, and Guideline E-23 on enterprise-wide model risk management for deposit-taking institutions. Accredited institutions are required to provide the following information to their Lead Supervisor within six months of each fiscal year-end:
- A letter from the Chief Risk Officer, confirming that the existing inventory of approved capital models continues to adhere to all minimum applicable requirements.
- Positive assurance from Internal Audit, in respect of the effectiveness of controls designed by management to ensure applicability to the inventory of approved capital models remains appropriate for regulatory capital purposes. Appended to this opinion should be a completed copy of the self-assessment for each risk factor. Supporting materials should be available and provided to OSFI upon request.
- A list of all approved capital models in production as of the reporting date. For IMA, this should also include the list of approved products to which the capital models are applied.
- A list of all waivers, exemptions, and migrations applicable as of the reporting date. Moreover, the name of the portfolio, its size, and expiry date of the waiver should be clearly reported.
Related Link: Implementation Note
Keywords: Americas, Canada, Banking, Regulatory Capital, CAR Guideline, Credit Risk, Market Risk, Counterparty Credit Risk, IRB Approach, Internal Model, Basel, OSFI
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