Office of the Superintendent of Financial Institutions
Capital requirements set out in the Capital Adequacy Requirements
(CAR) guidelines for banks, federally regulated trust and loan companies
and for bank holding companies (collectively referred to as institutions)
are regulatory minimums that assume an institution has a portfolio
of risk exposures that is highly granular and well diversified.
The CAR guideline specifies that institutions are expected to conduct
internal assessments of the adequacy of the capital they hold.
A thorough and comprehensive Internal Capital Adequacy Assessment
Process (ICAAP) is thus a vital component of a strong risk management
process. Each institution is responsible for developing and implementing
its own ICAAP for the purpose of setting internal capital targets
and developing strategies for achieving those internal targets that
are consistent with its business plans, risk profile and operating
environment. The ICAAP is not a regulatory compliance exercise.
The Basel II Framework requires banks to have a process for assessing
their overall capital adequacy in relation to their risk profile
and a strategy for maintaining their capital levels. It also requires
supervisors to review these assessments as well as banks’ ability
to monitor and ensure their compliance with regulatory capital ratios
and internal capital targets.
Basel guidance can be found in Part 3 of the Basel II Framework
(The Second Pillar – Supervisory Review Process), in the Basel Committee’s
May 2009 guidance,Principles for sound stress testing practices
and supervision, and in the July 2009 guidance, Enhancements
to the Basel II framework.
Having multiple sources for this guidance can lead to uncertainty
about OSFI’s expectations of domestic institutions and also about
interpretation of the Basel requirements. And as the Basel guidance
is intended for large, internationally active banks, there is little
or no mention of flexibility or proportionality that is needed when
this guidance is also to be applied to smaller institutions.
OSFI would like to put into place domestic guidance that sets
out expectations on ICAAP for Canadian institutions that can be
applied to both the large internationally active banks and to smaller
The advantage of this option is that OSFI would not have to devote
resources to developing its own guidance on ICAAP.
However, as mentioned above, there are several Basel sources of
this guidance, all intended for large internationally active institutions.
This, coupled with the fact that all federally regulated deposit-
taking institutions have adopted Basel II, can lead to confusion
about what exactly is expected of smaller players and also about
how OSFI’s review of ICAAP fits into the Supervisory Review Process.
The advantage of this option is that it results in one single
document that clearly lays out domestic expectations for ICAAP and
provides flexibility to institutions to tailor ICAAP to reflect
the complexity and range of their business activities, their risk
profile, and their operating environments.
This option may however result in OSFI needing to update domestic
guidance if and when additional guidance is provided by the Basel
Given the uncertainty inherent in having multiple sources of guidance
on ICAAP, OSFI is of the view that the creating of domestic guidance
is the most appropriate option for ensuring that institutions make
full and appropriate use of ICAAP. Further, sole reliance on international
guidance does not necessarily take into consideration factors that
may be unique to the Canadian marketplace or regulatory environment.
The guideline was issued for comment on August 6, 2010. As no
substantive comments were received, the guideline is unchanged from
the August draft.
OSFI will continue to assess institutions’ ICAAPs as part of the
supervisory review process. This guideline will be reviewed in three
years to ensure that the principles outlined in the guideline remain