ICAAP Expectations and Audit Requirements for ICAAP & BCAR

Document Properties

  • Type of Publication: Letter
  • Date: March 25​, 2022
  • To: DTIs using the Basel Standardized Approach to Credit Risk

OSFI last wrote to all Standardized Deposit-Taking Institutions (DTIs) on April 12, 2021, communicating our expectations for the 2021 Internal Capital Adequacy Assessment Process (ICAAP) submission and internal audit of the Basel Capital Adequacy Reporting (BCAR).

The purpose of this communication is to confirm the following:

  • OSFI expects DTIs to incorporate into their 2022 ICAAP process the impact of changes to the Capital Adequacy Requirements (CAR) Guideline. This includes advancing the proportionality of the capital framework that will come into effect in fiscal Q2 2023 (see link). The changes in the risk weights in various asset classes will have varying impacts on individual DTIs. However, some of these Pillar I changes may require a recalibration of internal target capital ratios.
  • 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.
  • OSFI will require Standardized DTIs 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 BCAR return.

ICAAP Expectations

As in the past, OSFI expects DTIs to continue practising prudent capital management, including the use of their ICAAP to identify, quantify and substantiate to their boards the Pillar 2 risks that underpin their target capital levels.

As a starting point for their ICAAP, OSFI expects DTIs to consider the revised capital framework coming into effect in fiscal Q2 2023. Specifically, the required changes to or revalidation of their internal capital targets should account for the increased risk sensitivity, segmentation of requirements, and targeted optionality of the new framework. For instance,

  • changes in the capital requirements for exposures to land acquisition, development, and construction (ADC) loans -- DTIs’ attention is drawn to equity and pre-sale conditions related to the risk weights for this type of exposure,
  • changes in the capital requirements for exposures to residential real estate, including more risk sensitivity in the risk weights and incorporation of updates to the capital treatment of privately insured mortgages,
  • availability of the new Simplified Standardized Approach for Credit Risk for certain asset class groupings for Category 1 and 2 institutions,
  • introduction of a simplified risk-based capital ratio for Category 3 institutions in lieu of the current risk-based and leverage ratio measures.

Standardized DTIs 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. On or before December 31, 2022, DTIs are expected to provide to their Lead Supervisor with the results of this assessment. 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 the institution, however, the contents of the submission should have a scope that includes the elements in the attached OSFI ICAAP template. DTIs are expected to include the summary quantitative matrix shown in the OSFI template as Appendix A.

Internal Audit Reviews of ICAAP and BCAR

By no later than March 31, 2023, OSFI expects each institution’s Internal Audit function to provide their OSFI Lead Supervisor with a copy of the audit reports on the following:

  1. Review of the 2022 ICAAP, including a view on each of the following elements:
    • 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,
    • identification of all key risks,
    • effectiveness of information systems that support the ICAAP,
    • appropriateness of the measurement methodology employed to support the ICAAP assessment and the accuracy and completeness of data input,
    • reasonableness of ICAAP output and assumptions used,
    • reasonableness and appropriateness of stress testing and analysis of assumptions,
    • integration of ICAAP results and risk management (e.g., limit setting and monitoring), and
    • reasonableness of the capital plan and internal capital targets.
  2. Review of the completeness and accuracy of one BCAR submission during the year including, but not limited to, a review of the following:
    • accurate categorization of Risk-Weighted Assets,
    • completeness of Off-Balance Sheet amounts, and
    • accurate amounts for credit risk mitigation (CRM).

Should you have any questions or concerns, please contact your OSFI Lead Supervisor.

Yours sincerely,

Jamey Hubbs
Assistant Superintendent
Deposit-Taking Supervision Sector