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    OSFI Statements Address BCAR, Culture Risk Management and DEI Strategy

    March 28, 2022

    The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments on effective culture risk management, set out expectations for Internal Capital Adequacy Assessment Process (ICAAP) submission and audit requirements of ICAAP and Basel Capital Adequacy Reporting (BCAR), and launched its Diversity, Equity, and Inclusion Strategy for 2022-2025.

    The ICAAP-related expectations from OSFI have been set out in a letter addressed to deposit-taking institutions using the Basel standardized approach to credit risk. The letter confirms that OSFI expects institutions to consider the revised capital framework coming into effect in the second quarter of fiscal 2023. The required changes to, or revalidation of, the internal capital targets should account for increased risk-sensitivity, segmentation of requirements, and targeted optionality of the new framework. Standardized deposit-taking institutions are required to assess the impact of the changes to the revised capital framework in their ICAAP, including the need to recalibrate their internal capital targets. The results from the impact assessment should be provided to OSFI by no later than December 31, 2022, along with the ICAAP to support recalibration of or maintenance of the existing target capital ratios. This package should include an updated ICAAP that supports any recalibration of target capital ratios or continued operations with the existing targets. The ICAAP package can utilize the scope and format used by an institution; however, the contents of the submission should have a scope that includes the elements in the OSFI ICAAP template attached with the letter. Deposit-taking institutions are expected to include the summary quantitative matrix shown in the OSFI template as Appendix A.

    The letter on ICAAP and BCAR expectations also mentions that OSFI will require standardized deposit-taking institutions to file with OSFI, by no later than March 31, 2023, a copy of the internal audit reports of their reviews on the 2022 ICAAP and their Basel Capital Adequacy Reporting (BCAR) return. The internal audit report of review of the 2022 ICAAP shall include a view on comprehensiveness and appropriateness of ICAAP in the context of the institution, its operating environment, the soundness of controls underpinning it, and OSFI’s expectations of a rigorous ICAAP process. The internal audit report of review of the 2022 ICAAP shall also provide a view on certain other elements including identification of all key risks, effectiveness of information systems that support the ICAAP, integration of ICAAP results and risk management, and reasonableness of the capital plan and internal capital targets. The audit report of the review of BCAR return shall include, but is not limited to, a review of the accurate categorization of risk-weighted assets, completeness of off-balance sheet amounts, and accurate amounts for credit risk mitigation.

    Additionally, OSFI issued a letter on culture risk management that is addressed to all federally regulated financial Institutions and federally regulated pension plans. In the letter, OSFI examines the culture practices of federally regulated financial institutions and how the risks created, perpetuated, or magnified by an institution's culture can affect their safety and soundness. Building on this work, OSFI plans to issue a principles-based, outcomes-focused culture risk management guideline for consultation in late 2022. This letter is seeking comments, until May 31, 2022, on the proposed outcomes of effective culture risk management that will form the basis of the future guidance and supervisory expectations from OSFI. As part of its future guidance, OSFI will expect federally regulated financial institutions to establish and maintain a robust approach to manage and oversee culture risks. OSFI is proposing six prudential outcomes that federally regulated financial institutions should achieve to support effective culture risk management. These outcomes are related to leadership, compensation, people management and incentives, accountability and ownership, risk mindsets and behaviors, group dynamics and decision-making, and resilience. The annex to the letter sets out additional details on the proposed outcomes.

     

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    Keywords: Americas, Canada, Banking, Basel, ICAAP, BCAR, Regulatory Capital, Reporting, CAR Guideline, Standardized Approach, Credit Risk, Governance, Diversity And Inclusion, DEI Strategy, Operational Risk, Culture And Conduct, OSFI

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