Approval of Regulatory Capital Models for Deposit-Taking Institutions

Document Properties

  • Type of Publication: Implementation Note
  • Category: Capital
  • Date: December 15, 2009
  • No: A-1

I. Introduction

This document outlines the key principles, and process for the approval of advanced approaches (“capital models”) for regulatory capital purposes, as outlined in the Capital Adequacy Requirements (CAR) Guideline A-1. These capital models relate to measurement of credit risk, operational risk, and market risk for the purposes of calculating minimum regulatory capital requirements in CAR Guideline A-1. The approval framework requirements are outlined for all deposit-taking institutions (“institutions”Footnote 1) intending either to use a new capital model or intending to implement material modifications to an already approved capital model (“material model modification”).

This document supports implementation of the CAR guidance by setting out the approval framework that will permit institutions to demonstrate their adherence to the minimum acceptance standards (“acceptance standards”) at the outset of an approval and ongoing, as part of the supervisory review process.

II. Background

The Capital Adequacy Requirements (“CAR”) Guideline (Chapter 1, Section 1.6) requires deposit-taking institutions (“institutions”) to seek prior approval from OSFI to use advanced approaches (“capital models”) for regulatory capital purposes. There are capital model approvals potentially available for each of the Pillar 1 risk classes (i.e., credit risk, operational risk, and market risk). The use of a capital model for regulatory capital purposes is subject to OSFI’s review and approval using the minimum requirements set out in the CAR Guideline A-1.

III. Definitions

Capital Model

A capital model for the purpose of this document is any “approach” or “model” that must be approved prior to use by OSFI for regulatory capital purposes.

Capital Model Types

There are different types of capital models. Capital models have distinguishing characteristics that vary by risk class (i.e., credit risk, operational risk, and market risk), by measurement metric (i.e., parameter risk measure vs. portfolio risk measure), and by risk measurement philosophy (i.e., the extent to which the capital model is developed out of risk management practices vs. theory and mathematics).

Capital model types can be divided into two subsets: (i) primary level, and (ii), secondary level. There are three primary level types of capital models:

  1. The Internal Ratings Based (“IRB”) Approach (including the Foundation (“FIRB”) and Advanced (“AIRB”) approaches) for credit risk;

  2. The Advanced Measurement Approaches (“AMA”) to operational risk; and,

  3. The Internal Models Approach (“IMA”) to market risk.

In addition to the primary level types of capital models, there are a range of secondary- level types of capital models that are also subject to OSFI approval. These capital models are either a subset of another capital model (e.g., the internal models market-based approach for equity exposures in the banking-book (“Equity-VaR”) that forms part of the IRB approach) or cover multiple risk classes (e.g., the Internal Modelling Method (“IMM”) for EAD of OTC derivative contracts).Footnote 2

Approval Applications

In addition to different types of capital models, there are two types of approval applications that OSFI expects to receive from institutions. The two types are:

  1. New capital models – capital models that are unrelated to the institution’s current inventory of OSFI-approved capital model types; and

  2. Material model modificationsFootnote 3– capital models that represent a material modification to an OSFI-approved capital model, i.e., capital models that are related to the existing inventory of OSFI-approved capital model types.

Acceptance Standards

The use of a new capital model (or material model modification) for regulatory capital purposes is subject to acceptance standards. Institutions are responsible for following the acceptance standards for capital model approvals. These acceptance standards are designed to help an institution to establish a capital model that meets the minimum requirements of the CAR Guideline A-1 at the outset of an OSFI approval, and on an ongoing basis.

The acceptance standards, comprising the five phases of the approval process, conceptually categorize the minimum requirements of CAR Guideline A-1 into four broad categories of requirements that frame all types of capital model approvals:

  1. Methodology – requirements that relate to the model’s risk measurement methodology;

  2. Integration – requirements that relate to the model’s integration into business and risk management;

  3. Operation – requirements that relate to the ongoing operation of the model; and,

  4. Control – requirements that relate to controls supporting the business(es) to which the model is applied.

The four dimensions of requirements mentioned above comprise all the various individual minimum requirements (paragraphs in the CAR Guideline) and should be assessed as part of the approval process. These dimensions will therefore form the basis of all approval decisions, as well as OSFI’s ongoing assessments of model appropriateness for regulatory capital purposes.

IV. Approval Principles

There are six principles governing the approval of new capital models or material model modifications. These six broad principles are as follows:

  • Principle 1: Approvals should be performed on a consolidated basis (i.e., the process should be consistent with OSFI’s supervisory approach), subject to OSFI standards regarding the measurement of capital for material subsidiaries of institutions.Footnote 4

  • Principle 2: Unless use of a capital model is mandated by OSFI, the decision to seek approval should be driven broadly by the institution, which is responsible for development, validation, and implementation of capital models that ensure adherence to the minimum requirements.

  • Principle 3: Applications should be submitted to OSFI for approval according to the schedule of a documented internal project plan for the design, modification and implementation of capital models and no earlier than when capital models are ready for use. Applications should be submitted only after OSFI and the institution have concluded preliminary assessments to confirm application readiness.

  • Principle 4: Approval applications should be complete with the institution’s capital model application appropriately covering all applicable minimum requirements.

  • Principle 5: The approval process should support the approval of new capital models, the review of material model modifications, and the ongoing monitoring of capital models to confirm appropriateness for regulatory capital purposes.

  • Principle 6: Approvals should be performed in coordination and cooperation with applicable foreign-country supervisors, i.e., OSFI’s approval process should reflect the Basel Committee’s cross-border principles for effective cooperation.Footnote 5

V. Key Phases for Approval Process

The key milestone that anchors the approval process is the proposed start date for the use of a new capital model or the implementation of a material model modification. Given the approval principles in the previous section, OSFI will use a process (“approval process”) to review approval applications that is broken down into five phases as outlined below:

  • Phase 1: Preparing for application
  • Phase 2: Applying for OSFI approval
  • Phase 3: Reviewing the capital model application
  • Phase 4: Approving or declining a capital model application
  • Phase 5: Monitoring an approved capital model (material model modification) for its ongoing appropriateness

Phase 1: Preparing for application

The objective of Phase 1 is to confirm that an institution is ready to submit an approval application to OSFI. The institution should therefore have performed sufficient work to demonstrate its adherence to minimum requirements in support of either a new capital model or a material model modification.

OSFI requires sufficient information to support an understanding and assessment of the model development process and the institution’s progress in implementing a capital model (or material model modification) that is ready for regulatory capital purposes. Given that this understanding and assessment will take time, institutions should ensure that OSFI has regularly updated information on the inventory and time lines of projects to develop or materially modify capital models for which the institution intends to apply for an approval.

OSFI expects Phase 1 to comprise both exploratory discussions aimed at clarifying expectations and timelines, as well as more formal efforts aimed at confirming application preparedness. Consequently, Phase 1 can be broken down into two parts:

Part 1A: Exploratory Discussions

OSFI will seek information from the institution that informs a broad understanding of the intended capital model, its application to business and risk management, and the associated efforts to prepare for its implementation. The institution is responsible for initiating these discussions with OSFI and providing the necessary information to support an understanding of direction and approach. Consequently, institutions should ensure

that information related to the development of the capital model (or material model modification) and its implementation is prepared ahead of exploratory discussions with OSFI. This information should detail, among other things, the following:

  1. Capital model type – The class of capital model that is covered by the approval application (i.e., IRB, AMA, IMA, etc);

  2. Approval type – The type of approval application, i.e., whether the model development work relates to either a new capital model or a material model modification;

  3. Implementation plan – The anticipated rollout or implementation plan for the capital model, including major deliverables, timelines, and associated execution risks; and,

  4. Rationale – The rationale for implementing the capital model and anticipated consequences (i.e., capital impact), including applicable assumptions related to materiality and coverage.

The information contained within (a) to (d), Text for screen readers: (a) to (d) = 1 to 4, above, should help OSFI to understand the timeline and comprehensiveness of an institution’s implementation plan and the implications of an approval application for its approval process. The information provided in Part 1A should therefore be used to structure a dialogue between the institution and OSFI on the reasonableness of the institution’s plans in the context of OSFI’s approval process. In certain cases, OSFI may undertake exploratory reviews (“Discovery Reviews”) to assess the reasonableness of the institution’s plans and approach.

Part 1B: Preparation Assessment (Pre-Application Package)

Where an institution wishes to proceed with its approval application, the exploratory discussions will ultimately give way to a more formal determination by OSFI of whether or not an institution is ready to apply for OSFI approval. The institution will be responsible for organizing and submitting a “Pre-Application Package” to OSFI, which should contain sufficient information to demonstrate at a summary-level that the new capital model or material modification meets the applicable minimum requirements in CAR Guideline A-1. Consequently, institutions should ensure that the following information is prepared for OSFI review within their Pre-Application Package:

  1. Model suitability – The suitability of the capital model for OSFI approval given the applicable minimum requirements established by the CAR Guideline A-1;

  2. Model implementation – The status of the capital model’s implementation plan with evidence that the plan is substantially complete;

  3. Model assumptions – The key assumptions embedded in the model development process, including execution risks associated with any residual work that may remain post-application;

  4. Model review – a description of all the internal review (i.e., validation and vetting) work performed or planned on the approval application;

  5. Capital impact – The implications of the capital model for Pillar 1 minimum capital requirements, including results of any preliminary estimate of capital impact assessments; and,

  6. Model risk – an internal assessment by the institution of the inherent model risk associated with its approval application.

The information contained within (a) to (f), Text for screen readers: (a) to (f) = 1 to 6, above, should inform OSFI’s assessment of application preparedness for OSFI review. Other information may also be required, as part of the preparation assessment because the depth and extent of information required will vary based on the type of capital model, the approval application, the size and complexity of the institution, and the nature of the operations in Canada (i.e., whether or not the institution is domestic-owned vs. a foreign-bank subsidiary).

Phase 2: Applying for OSFI approval

Once the institution has satisfactorily completed Phase 1, it will proceed to Phase 2. As part of Phase 2, the institution will submit a formal application (“Application Package”) to OSFI containing sufficient information to clearly demonstrate how the new capital model or material model modification adheres to all applicable minimum requirements.Footnote 6, Footnote 7

The organisation of information required to support the Application Package will be broadly consistent, whether it relates to a new capital model or a material model modification. However, the volume and depth of information will vary, with the Application Package for material model modifications focusing only on the specific change(s) and related subset(s) of minimum requirements, rather than the full set of minimum requirements in CAR Guideline A-1 that would be required for new capital models.

The Application Package should include the following information as-at the most recent fiscal quarter end:

  1. A cover letter from the Chief Risk Officer, addressed to the Assistant Superintendent, Supervision. The letter will include the following:

    1. an attestation that the new capital model or material model modification has met all applicable minimum requirements and that it is therefore ready for regulatory capital purposes.

    2. information on the nature of any and all representations made to the Audit and Risk Committees of the Board in respect of the capital model implementation and approval process, in order to confirm that the board (and senior management) has received appropriate representations to fulfill their responsibilities relating to the approval.

    3. the proposed start date for using the new capital model or material model modification (and subject to the lead times set out in this document).

  2. A completed self assessment package (“SAP”) Footnote 8 that includes:

    1. a description of the self-assessment process, including the related governance and sign-off procedures;

    2. a completed set of capital model self-assessments against minimum requirements in CAR Guideline A-1 using the assigned templates (see Appendix 2).

    3. a description of the structure of all relevant supporting documentation, including an inventory of all reports related to the internal review (validation or vetting) of the new capital model or material model modification;

    4. a comparison of outcomes from the parallel calculation of capital requirements using the current regulatory capital reporting requirement and the capital requirements using the proposed capital model or material model modification (“parallel reporting”) – management’s view of the drivers of variation and the implications for the institution’s ICAAP should also be included;

    5. a summary report on backtesting results; and,

    6. an assessment by the institution of the inherent model risk associated with its new capital model or material model modification.

  3. Applications for applicable domestic subsidiaries that are themselves federally regulated financial institutions and intend to use the capital model for regulatory capital purposes.

  4. A description of any and all assumptions related to the institution’s approval application, including assumptions related to materiality (e.g., the rollout and coverage of the capital model or impact of material model modification), the intended application of the new capital model or material model modification (i.e., application by legal entity, business unit, and asset class, as applicable), as well as any assumptions related to anticipated future deliverables (e.g., outstanding action items related to internal validation reports).

In addition to the information submitted by business and risk management, the institution will submit:

  1. A description of the work performed by internal audit in respect of the institution’s adherence to minimum requirements, as well as work performed in support of the institution’s opinions or assurances, as applicable.

    1. For approval applications covering new capital models, internal audit (or another equally independent unit) should provide OSFI with an audit report, and positive opinion related to the effectiveness of controls designed by management to ensure adherence to the applicable minimum requirements.Footnote 9, Footnote 10

    2. For approval applications covering material model modifications, internal audit (or another equally independent unit) should provide OSFI with an audit report accompanied by a cover letter related to the effectiveness of controls designed by management to ensure (ongoing) adherence to the applicable minimum requirements.

The information contained within (a) to (e), Text for screen readers: (a) to (e) = 1 to 5, above, will permit the institution to demonstrate its adherence to minimum requirements in the CAR Guideline A-1, as well as highlight the intended use and application of the capital model or material model modification.

Phase 3: Reviewing the capital model application

OSFI’s review of the institution’s Application Package represents the third phase of its approval process. As part of the review process, OSFI will assess the self-assessments and supporting information delivered by the institution, through a combination of documentation review and the use of specific supervisory reviews (“Approval Reviews”) designed to verify the appropriateness of the institution’s self-assessments. During the course of its review, OSFI may require additional information, as needed. Where applicable, OSFI will notify institutions of material approval issues that may adversely affect an approval decision outcome.

Once OSFI has completed its review of the Application Package, the institution’s application will progress to the next phase of the approval process.

Phase 4: Approving or declining a capital model application

The penultimate phase of OSFI’s approval process involves the capital model approval decision by OSFI. Phase 4 consolidates the findings and conclusions emanating from Phase 3 to support an approval decision outcome.

In terms of specific approval decision outcomes, there are three possibilities:

  1. Full approval – an approval is granted without conditions;

  2. Approval with conditions – an approval is granted but subject to constraint(s); and,

  3. Deferral (decline or re-submit) – an approval is not granted.

The approval decision outcome will be communicated in writing to the institution. Where approval conditions are stipulated, OSFI expects the institution to address these on a timely basis and will review these, as part of Phase 5, below.

Phase 5 - Monitoring an approved capital model (material model modification) for its ongoing appropriateness

To be eligible to use a capital model for regulatory capital purposes, an institution should demonstrate to OSFI that it is in compliance with the applicable minimum requirements in the CAR Guideline A-1 at the outset, and on an ongoing basis. Consequently, OSFI expects institutions to have the necessary policies and procedures to support the review of approved capital models and to ensure their appropriateness for ongoing use in regulatory capital computation. As part of the ongoing review of capital model appropriateness, the institution should:

  1. establish a process for the ongoing review of approved capital models against applicable minimum requirements, including the use of a capital model performance monitoring program to assess whether or not the capital model outputs continue to perform as expected;

  2. ensure that all capital models are appropriately covered by the ongoing governance and control of model risk; and,

  3. ensure that all modifications to approved capital models are consistently captured through a comprehensive change management process, irrespective of materiality.

In addition, the institution is expected to submit to OSFI on an annual basis the following information:

  1. a letter from the Chief Risk Officer (CRO) confirming that the existing inventory of OSFI-approved capital models continues to adhere to all applicable minimum requirements; and,

  2. a positive opinion from internal audit in respect of the effectiveness of controls designed by management to ensure the OSFI-approved inventory of capital models remains appropriate for regulatory capital purposes.Footnote 11

OSFI will revisit capital model approval decisions from time-to-time, and will periodically review capital models against specific aspects of minimum requirements, as part of ongoing supervisory review, in order to confirm their ongoing appropriateness for regulatory capital purposes.

VII. Additional Considerations

In addition to the process outlined above, there are some additional factors that should be taken into consideration. This section outlines these other factors in further detail.

Timing

The length of the time period associated with the approval process or its individual phases will vary based on the type and complexity of the capital model (or material model modification) application. OSFI expects that more time will be taken during the initial part of its approval process (i.e., Phase 1), as the institution will be responsible for demonstrating to OSFI’s satisfaction that its capital model (or material model modification) is ready for regulatory capital purposes. Once OSFI is comfortable with the institution’s preparedness, then it expects to complete its review and approval decision within six months (three months) of receipt of an Application Package for a new capital model (material model modification).

Irrespective of the type of approval application, OSFI will require at least one month of notice period, prior to the submission of an Application Package under Phase 2.

Parallel Reporting

The parallel reporting period for all new credit risk (IRB) and operational risk (AMA) capital models should cover at least two consecutive quarters of internal management reporting, prior to the submission of an Application Package.Footnote 12 In respect of market risk (IMA) and all other secondary level types of capital models, the parallel reporting period should be at least 60 days of internal management reporting, prior to the submission of an Application Package.

For material model modifications, the parallel reporting period for IRB and AMA capital models should be at least one quarter of internal management reporting, prior to the submission of an Application Package, while the IMA and all secondary level types of capital models should be at least 20 working days of internal management reporting, prior to the submission of an Application Package.

Backtesting

Backtesting provides important information on the performance of capital models and should therefore form an important part of an institution’s application to OSFI. Institutions should provide at least 12 quarters (3 years) of backtesting data for all new credit risk (IRB) and operational risk (AMA) capital models, as part of their Application Package. In respect of market risk (IMA) and all other secondary level types of new capital models, institutions should provide at least 120 days of backtesting data, as part of their Application Package.

For material model modifications, institutions should provide at least four quarters (1 year) of backtesting data for IRB and AMA capital models. By contrast, for the IMA and all secondary level types of capital models institutions should provide at least 60 days of backtesting data for material model modifications.

Materiality of model modification

An institution is expected to establish and maintain a materiality definition for model modifications associated with each of its OSFI-approved capital model types. These definitions are subject to OSFI review and should be documented in a board-approved policy and should take into consideration, among other things, the institution’s assessment of inherent model risk and capital impact. This policy applies only to modification and does not eliminate OSFI approval for excluding portfolios or businesses from the requirement to adopt advanced methodologies for credit, market, or operational risk.

In arriving at a suitable assessment of materiality, the institution should consider a combination of qualitative and quantitative factors:

  • Qualitative Assessments – those factors that affect a model’s risk management environment. These factors include, among other things, the following:

    • Impact on the capital model’s (qualitative) methodology, its performance over the cycle and during stress environments, and its integration, operations and control environment;

    • Changes made to the information technology infrastructure and related data maintenance; and,

    • Mergers and acquisition and the institution’s strategic outlook.

  • Quantitative Assessments – those factors that provide insight into risk measures. In assessing materiality from a quantitative perspective, the institution should review the changes against its internal (quantitative) definition of materiality, including references to the affected size of risk-weighted assets (RWA) and minimum capital requirements.

The institution should determine the materiality of all capital model modifications, irrespective of materiality, and should document its conclusions. It should be noted that non-material model modifications will not require approval by OSFI.

The following principles should govern the determination of a materiality definition, which should also be explicitly referenced in the institution’s internal policies:

  • Principle 1: The materiality definition should include a quantitative measure of the capital impact at the asset class/risk factor level, total risk-weighted assets (RWA) of the applicable product and relevant asset / market risk class as defined in CAR Guideline A-1 and as well, the potential maximum notional or principal value.

  • Principle 2: In addition to the point-in-time (static) capital impact, the materiality definition should consider the projected capital impact based on planned strategic changes in the related book of business over the institution’s capital planning cycle and for contingent and stochastic exposures on a stress scenario.

  • Principle 3: The materiality definition should reflect expected changes in the distribution of the risk profile of the affected portfolio over the capital planning cycle.

  • Principle 4: The institution’s board of directors or a designated committee thereof must review and approve the materiality definition.

In addition to the above, the institution is expected to provide OSFI with regular updates on the status of its intended capital model modifications. In this regard, the institution should:

  1. submit to OSFI a schedule of material model modifications for the following fiscal year, two months before the end of the current fiscal year.Footnote 13

  2. maintain a log of all model modifications (a “Model Modification Inventory”Footnote 14), irrespective of materiality, which should be submitted to OSFI as-at the end of Q2 and Q4, each fiscal year. The log should be submitted to OSFI no later than 30 days after the respective fiscal quarter-end date.

  3. submit the results of all model modifications to the board or a designated committee thereof for its review, at least annually.

  4. ensure that internal audit review the effectiveness of controls designed by management to ensure the completeness and accuracy of the model modification inventory, as well as the effectiveness of the change management process for implementing modifications to OSFI-approved capital models.

OSFI recognises that institutions will make many and various modifications to their OSFI-approved inventory of capital models and that this may present a challenge when it comes to the timely implementation of material model modifications. However, OSFI believes that the repackaging of material modifications into non-material modifications in order to expedite the implementation of capital model modifications is inconsistent with a sound process of capital model review and approval. Therefore, OSFI will continue to monitor all capital model modifications periodically, and will also review the cumulative impact of non-material changes. Where OSFI concludes that non-material modifications are inconsistent with its approval process, it will expect the institution to submit an Application Package for each of these modifications.

Sound Risk Management Practices

OSFI’s approval process is based on the applicable minimum requirements contained within the CAR A-1 Guideline. In addition to these minimum requirements, institutions’ overall risk management practices are expected to be consistent with the evolving sound practice guidelines issued by the Basel Committee on Banking Supervision (“BCBS”) for the associated risk class (and capital model type), i.e., credit risk (IRB), market risk (IMA), and operational risk (AMA). As a consequence, OSFI may seek additional information related to the institution’s adherence to the applicable sound practices, as part of its approval process.

Foreign Bank Subsidiaries

OSFI’s approval process recognises the BCBS’ principles for the effective cross border implementation of the Basel II framework, subject to statutory restrictions and within the framework of bi-lateral memoranda of understanding with other supervisors.Footnote 15 Consequently, OSFI will work with applicable home-country supervisors to avoid performing redundant and uncoordinated approval and review work, in respect of foreign-bank subsidiaries’ capital model applications to OSFI.

The approval process outlined above is applicable to foreign-bank subsidiaries. OSFI recognises that supporting information and opinions from the home-country supervisor and parent bank institution will form part of its review and approval process. However, foreign bank subsidiaries should ensure that their application meets OSFI’s requirements for reporting in Canada, and that local management is able to demonstrate that its capital models used for OSFI reporting adhere to the applicable minimum requirements outlined in the CAR A-1 Guideline.

The Application Package outlined in Section V is applicable to foreign-bank subsidiaries. In addition to the information set out in Part V, the following information should also be provided within the cover letter from the Chief Risk Officer (CRO):

  1. a brief description of model development responsibilities, including an overview of those capital models that are developed and implemented on a centralized basis vs. those capital models developed and implemented locally by the foreign subsidiary bank; and,

  2. a brief description of any differences in the Pillar 1 approaches adopted by the parent-bank institution for consolidated reporting vs. the foreign bank subsidiary for sub-consolidated reporting to OSFI (including an explanation of any differences, where applicable).

In addition, the Application Package should include a high-level description of the division of responsibilities between the parent bank institution and the foreign bank subsidiary in respect of internal audit work performed and planned to support the capital model (or material model modification) application to OSFI.

Appendix 1: Capital Model Types

The capital model types covered by this document are outlined below. A separate and distinct Application Package is required for each type of “model type”, below. With respect to the Internal Models Approach (“IMA”), separate approval applications are expected for each respective risk factor.

Primary Risk Class Level of Capital Model Model Type
Credit Primary (1) Advanced Internal Ratings Based (“AIRB”) Approach
Primary (2) Foundation Internal Ratings Based (“FIRB”) Approach
Secondary (3) ‘Equity VaR’ - IRB approach for equity exposures in the banking book
Secondary (4) ‘Repo VaR’ - VaR model approach for repo-style transactions in the (AIRB) banking book
Secondary (5) Internal Modeling Method (“IMM”) for Counterparty Credit Risk
Operational Primary (6) Advanced Measurement Approaches (“AMA”) to operational risk
Market Primary

(7) Internal Models Approach (“IMA”) to interest rate specific risk (including - Incremental risk chargeFootnote 16)

(8) Internal Models Approach (“IMA”) to equity specific risk

(9) Internal Models Approach (“IMA”) to general market risk

Appendix 2A: Self-Assessment Template and Reference Lists

The template below provides an illustration of the structure of information that institutions are expected to provide in their self-assessments templates.

Table A1: Self-Assessment Template

Paragraph (see Appendix 2B for listing) Target Compliance Date Compliance Rating Internal Audit (Audit Status) Comments, including names of supporting documents
[###] DD/MM/YY Full Compliance/Substantial Compliance/Partial Compliance/Not Compliant Audit work completed/No Audit work planned/Audit work in progress [Enter comments as required]
[###] DD/MM/YY Full Compliance/Substantial Compliance/Partial Compliance/Not Compliant Audit work completed/No Audit work planned/Audit work in progress [Enter comments as required]
[###] DD/MM/YY Full Compliance/Substantial Compliance/Partial Compliance/Not Compliant Audit work completed/No Audit work planned/Audit work in progress [Enter comments as required]

Appendix 2B: Minimum Requirements Reference List

The table below provides a reference list to assist institution in identifying applicable minimum requirements for each capital model type, as set out in the CAR Guideline A-1. Institutions must conduct their own independent assessment of sections of the CAR guideline A-1 to ensure all sections relevant to their application are addressed

Type of Capital Model IRB Asset Class Breakdown (if applicable) Paragraph Reference in CAR Guideline A-1
(1) AIRB Corporate, Sovereign, Bank Chapter 5 ( viz. paragraphs 270-286, 294-301, 306-310, 316, 317, 319-325, 387-395, 401-426, 428-431, 434-489, 491-493, 495-504),
Retail Chapter 5 (viz. paragraphs 211-217, 231, 232, 234, 252, 256-266, 326-338, 374-376, 380-393, 401, 402, 409-421, 434-460, 464-477, 479-488, 500-504)
(2) FIRB Corporate, Sovereign, Bank Chapter 5 (viz. paragraphs 270-286, 287-296, 302-305, 311, 315, 319-325, 387-395, 401-426, 428-431, 434-489, 491-493, 495- 524,)
Retail Chapter 5 (viz. paragraphs 211-217, 231, 232, 234, 252, 256-266, 326-338, 374-376, 380-393, 401, 402, 409-421, 434-460, 464-477, 479-488, 500-504)
(3) Equity VaR Chapter 5 (viz. Paragraphs 339-361, 525-536)
(4) Repo VaR Chapter 3, 4 and 8 (viz. Paragraphs 178, 179 and 181, Sections 8.11.2, 8.11.4, and 8.11.7 and Annex 4 - paragraphs 42-46)
(5) IMM Chapter 3 (viz. Annex 4)
(6) AMA Chapter 7 (viz. 644, 655-659, 664-683, Annex 8, Annex 9)
(7) IMA - Interest rate specific risk Chapter 8 (viz. sections 8.11.1, 8.11.2, 8.11.3, 8.11.4, 8.11.5, 8.11.6, 8.11.7)
(8) IMA - Equity specific risk Chapter 8 (viz. sections 8.11.1, 8.11.2, 8.11.3, 8.11.4, 8.11.5, 8.11.6, 8.11.7)
(9) IMA - General market risk Chapter 8 (viz. sections 8.11.1, 8.11.2, 8.11.3, 8.11.4, 8.11.6, 8.11.7)

Appendix 3: Model Modification Inventory

The following information should be maintained as part of the model modification inventory:

Change Specific Information

  • Capital Model Type
  • Asset class/Risk factors (as applicable)
  • Purpose and rational for modification
  • Brief Description of modification
  • Risk-class (i.e., credit risk, operational risk, or market risk) specific RWA, including $ impact and percentage (%) change
  • Modification completion date
  • Modification implementation date
  • Status of approval (i.e. non-material – i.e., not applicable, material – i.e., submitted to OSFI for review, and implemented – i.e., OSFI approved)

Memo item

  • Cumulative four-quarter RWA change in $ and in % for all changes classified by the bank as non-material.

Footnotes

Footnote 1

Banks and bank holding companies to which the Bank Act applies and federally regulated trust or loan companies to which the Trust and Loan Companies Act applies are collectively referred to as “institutions”.

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Footnote 2

The complete listing of capital models is detailed in Appendix 1.

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Footnote 3

See Section VII for further discussion of capital model modifications, and materiality.

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Footnote 4

Where capital models are intended to be used for federally regulated financial institutions (FRFIs) that are themselves a subsidiary of another FRFI, then these should be clearly set out in the institution’s application.

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Footnote 5

See BCBS’ 2003 High Level Principles for the Cross-Border Implementation of the New Accord.

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Footnote 6

For instances where there are non-material modifications, the institution is not required to submit a formal Application Package, but must instead maintain an inventory of all such modifications that should be available for OSFI review.

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Footnote 7

In exceptional circumstances, OSFI may request an Application Package for the subsequent (post- approval) roll out of material portfolios that were excluded (or “waived”) from the original approval of the capital model.

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Footnote 8

For instances that involve material model modifications, the institution should only update those sections of the SAP that relate to the modification and submit this to OSFI.

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Footnote 9

This opinion should include in its scope both the self-assessment process and the process used by senior management (the CRO) in support of the senior management attestation.

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Footnote 10

The effective date of the opinion should be the same as the Application Package (i.e., as-at the most recent fiscal quarter-end date). OSFI recognises that some time may transpire between the opinion as-at date and the submission date to OSFI, in order to complete the necessary assessment and documentation. The institution should therefore submit its completed Application Package within two months of the as-at date of the Application Package.

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Footnote 11

Among other things, the scope of work should include the effectiveness of controls designed by management to review the ongoing appropriateness of its capital models for regulatory capital purposes, and the effectiveness of change management controls designed by management to address capital model modifications and materiality.

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Footnote 12

For IRB and AMA new capital model applications, OSFI expects parallel reporting to continue beyond the submission date of the Application Package (via the institution’s internal reporting processes) up until the issuance of its approval decision.

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Footnote 13

As part of its submission, the institution should also highlight any new capital model applications that it expects to submit to OSFI for the same period.

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Footnote 14

See Appendix 3 for a suggested template for the Model Modification Inventory.

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Footnote 15

The BCBS has issued extensive guidance on the respective roles of home- and host-country supervisors and associated information exchange to support capital model approvals under Basel II. See BCBS’ 2003 High Level Principles for the Cross-Border Implementation of the New Accord and BCBS’ 2006 paper on Home-Host Information Sharing for Effective Basel II Implementation and as well, 2007 Principles for Home-Host Supervisory Cooperation and Allocation Mechanisms in the context of Advanced Measurement Approaches (AMA).

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Footnote 16

Minimum requirements under development.

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