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
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The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.
The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.
The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.
The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.
The European Banking Authority (EBA) Single Rulebook Question and Answer (Q&A) tool updates for this month include answers to 10 questions.
The European Commission, or EC, finalized the Implementing Regulation 2021/2017 with respect to the benchmark portfolios, reporting templates, and reporting instructions for the supervisory benchmarking of internal approaches for calculating own funds requirements.
The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.
The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).
The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.