OSFI Proposes to Enhance Assurance Expectations for Basel Returns

At present, OSFI has a range of assurance expectations for capital, leverage, and liquidity returns. For deposit-taking institutions using the internal ratings-based approach for credit risk, senior management submits an annual attestation for compliance with minimum regulatory requirements for regulatory capital models and an internal audit opinion is submitted for approved regulatory capital models. For deposit-takers using the standardized approach for credit risk, the internal audit function also performs a periodic review of the Basel Capital Adequacy Return (BCAR) that is submitted to the Lead Supervisors of OSFI. OSFI now also proposes to have the assurance expectations apply to the capital, leverage and liquidity returns of all federally regulated deposit-taking institutions.

The regulatory returns in scope for domestic systemically important banks (D-SIBs) and small and medium-size deposit-taking institutions (SMSBs) include the BCAR, Leverage Requirements Return (LRR), and liquidity returns for the Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), Net Cumulative Cash Flow (NCCF), and the Operating Cash Flow Statement (OCFS). Consistent with the proposed SMSBs’ Capital and Liquidity Requirements, the assurance expectations for SMSBs do not apply to foreign bank branches. The associated guidelines include the Capital Adequacy Requirements (CAR), Leverage Requirements (LR), Total Loss Absorbing Capacity (TLAC), and Liquidity Adequacy Requirements (LAR). The OSFI initiative to advance proportionality in the capital and liquidity regime for SMSBs includes proposed changes to the SMSB Pillar 1 capital and liquidity frameworks. Therefore, OSFI is proposing that the assurance expectations complement the proportionality initiative to reflect the size, nature, complexity, and business activities of SMSBs.

Moreover, certain external audit requirements exist in most insurance guidelines but not in the CAR, LR, TLAC, and LAR guidelines for federally regulated deposit-taking institutions; however, senior management submits an annual attestation for compliance with minimum regulatory requirements for regulatory capital models and internal audit performs a periodic review of the BCAR. Therefore, OSFI proposes to better align external audit requirements between the insurance and deposit-taking industries. OSFI also proposes to require an annual internal audit opinion on the accuracy and completeness of key regulatory returns, which includes a conclusion on the effectiveness of internal controls. The internal audit may be completed at any time during the fiscal year. The proposals in this area aim to reduce misstatements on the regulatory returns by relying on the third line of defense to enhance governance and controls. 

Related Links

• Press Release
• Consultation Letter
• Discussion Paper (PDF)

Comment Due Date: June 18, 2021

Keywords: Americas, Canada, Banking, Basel III, Internal Audit, Materiality, Reporting, Proportionality, Internal Control, External Audit, Compliance Risk, Regulatory Capital, Liquidity Risk, Leverage Ratio, OSFI