Office of the Superintendent of Financial Institutions
By lawFootnote 1, the board of directors of a financial institution is required to establish, and the financial institution is required to adhere to, "investment and lending policies, standards and procedures that a reasonable and prudent person would apply in respect of a portfolio of investments and loans to avoid undue risk of loss and obtain a reasonable return." In addition, each financial institution must comply with the statutory investment limits set out in the applicable legislation (see Appendix).
This guideline outlines factors that the Office of the Superintendent of Financial Institutions expects the financial institution to consider in establishing investment and lending policies and in ensuring that they are effectively implemented. It is meant to serve as a guide and the provisions of the guideline should be adapted by each institution to reflect the activities and risks of its business.
Every financial institution is required to have written investment and lending policies. These policies should describe the objectives for the investment and lending programs and the overall risk philosophy of the institution. They should take into account the strength of the institution's capital and its ability to absorb potential losses.
The policies should take note of the liability structure of the financial institution and the anticipated demands for funds and address how maturity profiles are to be established on the portfolios of investments and loans in light of these demands. They should establish limits on the institution's exposure to a person or a group of associated persons and to interest rate and currency risk. In setting these limits the institution should consider its exposure under a variety of potential scenarios.
Please refer to OSFI’s Corporate Governance Guideline for OSFI’s expectations of financial institution Boards of Directors in regards to operational, business, risk and crisis management policies.
Financial institutions are required to have written internal procedures outlining how the investment and lending policies will be implemented and monitored. Institutions should ensure that the policies are implemented by persons, either on staff or under contract, who have the appropriate level of expertise. These procedures should address exposures arising from both on-balance sheet and off-balance sheet items.
The procedures should:
In addition, they should describe the method for classifying loans and investments and the basis for valuing loans and investments that are not regularly traded. There should be written procedures describing custodial arrangements of these assets. In developing these procedure, reference should be made to the regulations on protection of assets.
Procedures should be in place to monitor and control the institution's exposure to fluctuations in interest rates, foreign exchange rates, and market prices.
Potential sources of conflict of interest should be identified and procedures should be in place to ensure that those involved with the implementation of the investment and lending policies understand where these situations could arise and how they should be addressed.
The investment policy should identify acceptable ranges for investments in different types of instruments, including cash, equities, bonds and debentures, and real property. The lending policy should establish limits on aggregate outstanding loans by type of loan broken down by major category (e.g., commercial, consumer). These broad categories should be further subdivided as necessary; for example, mortgages could be subdivided between insured and uninsured mortgages and limits set accordingly.
The policy should set limits according to the source of loans where third parties such as mortgage brokers or syndications are relied upon. In addition, there should be an aggregate limit established on externally sourced loans.
Financial institutions should set limits on investments and loans according to their quality. For example, financial institutions may use ratings from recognized rating agencies in establishing quality criteria for their investments. Internal criteria would have to be established for non-rated investments. Similarly, internal criteria should be established for assessing the credit quality of borrowers.
Where applicable, limits should be established on exposures to industries and geographic regions.
Financial institutions should establish limits to contain the risks arising from potential changes in currency or interest rates. They should have policies outlining the circumstances in which derivative instruments can be used. In addition, they should establish limits on the use of derivative instruments by type of instrument (e.g., swaps, options, futures) and by counterparty.
Institutions are not required to file policies and procedures with the Office on a regular basis; however, the written policies and procedures should be available for review immediately upon request.
The institution will be expected to maintain information on its portfolios presented in a manner that facilitates analysis, for example:
Where information required to perform this analysis is not available through the filing of statutory returns, the Office may request supplemental information that expands on the areas of greatest risk.
Sections 503 and 504 of the Insurance Companies Act (ICA)
Section 506 of the ICA and subsection 5(1) of the Investment Limits (Insurance Companies) Regulations (ILICR)
Limits do not apply to:
Section 507 of the ICA and subsection 5(2) of the ILICR
Paragraphs 508(c) and (d) of the ICA and subsection 5(3) of the ILICR
Subsection 616(1) of the ICA and section 11.1 of the Commercial Loan (Insurance Companies, Societies, Insurance Holding Companies and Foreign Companies) Regulations (Commercial Loan Regulations)
Subsections 618(1) and (2) of the ICA and paragraphs 3(a) and (b) of the Investments Limits (Foreign Companies) Regulations (ILFCR)
Subsections 619(1) and (2) of the ICA and section 4 of the ILFCR
Paragraph 620(a) of the ICA
Section 562 of the ICA and section 8 of the Commercial Loans Regulations
Section 563 of the ICA and subsection 4(2) of the Investment Limits (Canadian Societies) Regulations (ILCSR)
Section 565 of the ICA and subsection 4(2) of the ILCSR
Section 566 of the ICA
Section 505 of the ICA and section 5 of the Commercial Loans Regulations
Section 506 of the ICA and paragraph 5(1)(b) of the ILICR
Section 507 of the ICA and paragraph 5(2)(b) of the ILICR
Section 508 of the ICA and paragraph 5(3)(b) of the ILICR
Section 617 of the ICA and section 11.2 of the Commercial Loan Regulations
Subsection 618(3) of the ICA and paragraph 3(c) of the ILFCR
Subsection 619(3) of the ICA and section 4 of the ILFCR
Paragraph 620(c) of the ICA
Section 963 of the ICA – per business powers, no consumer or commercial loans directly by IHC
Section 981 of the ICA and subsection 5(1) of the Investment Limits (Insurance Holding Companies) Regulations (ILIHCR)
Section 982 of the ICA and subsection 5(1) of the ILIHCR
Section 983 of the ICA and subsection 5(2) of the ILIHCR
Section 476 of the Bank Act (BA) and subsection 5(1) of the Investment Limits (Banks) Regulations (ILBR)
Does not apply to widely held banks with equity ≥$1 billion or to banks with equity ≥$1 billion and controlled by a widely held eligible entity (refer to paragraph 3(b) of the ILBR)
Section 477 of the BA and subsection 5(1) of the ILBR
Section 478 of the BA and subsection 5(2) of the ILBR
Section 922 of the BA – per business powers, no commercial or consumer loans directly by BHC.
No restrictions on commercial or consumer lending for the BHC subsidiaries
Section 938 of the BA and subsection 5(1) of the Investment Limits (Bank Holding Companies) Regulations (ILBHCR)
Does not apply to widely held BHCs with equity ≥$1 billion or to BHCs with equity ≥$1 billion and controlled by a widely held eligible entity (refer to paragraph 3(b) of the ILBHCR)
Section 939 of the BA and subsection 5(1) of the ILBHCR
Section 940 of the BA and subsection 5(2) of the ILBHCR
Sections 461, 462 and 463 of the Trust and Loan Companies Act (TLCA)
Section 464 of the TLCA and subsection 5(1) of the Investment Limits (Trust and Loan Companies) Regulations (ILTLCR)
Limit does not apply to a widely held company with equity ≥ $5 billion or to a company with equity ≥ $5 billion and controlled by a widely held eligible entity (refer to paragraph 3(b) of the ILTLCR)
Section 465 of the TLCA and subsection 5(1) of the ILTLCR
Section 466 of the TLCA and subsection 5(2) of the ILTLCR
Sections 398, 399 and 400 of the Cooperative Credit Associations Act (CCAA)
Section 401 of the CCAAand subsection 5(2) of the Investment Limits (Cooperative Credit Associations) Regulations (ILCCAR)
(the equity percentage is defined in subsection 5(1) of the ILCCAR)
Limit does not apply to an association if its equity and minority interests in entities controlled by the association is ≥ $5 billion (see section 3 of the ILCCAR)
Section 402 of the CCAA and subsection 5(3) of the ILCCAR
The legislative references are: section 465 of the Bank Act, section 450 of the Trust and Loan Companies Act, section 387 of the Cooperative Credit Associations Act and sections 492 and 551 and subsection 615(1) of the Insurance Companies Act.
Return to footnote 1 referrer