Office of the Superintendent of Financial Institutions
On August 26, 2009, OSFI issued a draft version of Guideline E-18
for comment. This letter issues Guideline E-18 in its final form.
The guideline sets out that an institution’s stress testing program
should be commensurate with the nature and complexity of the institution
and its risk profile. Stress testing should be embedded in enterprise
wide risk management. A stress testing program as a whole should
be actionable, playing an important role in facilitating the development
of risk mitigation or contingency plans across a range of stressed
conditions. It should feed into the institution’s decision making
process, including setting the institution’s risk appetite, setting
exposure limits, and evaluating strategic choices in longer term
The guideline sets out OSFI’s expectations with respect to the
use of stress testing by all federally regulated financial institutions.
The guideline reflects OSFI’s assessment of improvements needed
for DCAT and stress testing in insurance companies generally. The
guideline is also consistent with and embodies the principles included
in the Basel Committee’s May 2009 guidance,
Principles for sound stress testing practices and supervision.
We received a sizable number of comments from banks, insurance
companies and actuaries and, in response we made changes to the
guideline. Comments focused primarily on the timing of the DCAT
and on the implementation of the guideline.
The draft guideline set out an expectation that an insurer’s annual
DCAT would be available to the board of directors no later than
six months after year. This was the most commented on aspect of
the guideline. Commenters pointed out that requiring DCAT to be
completed within six months of year end does not mesh well with
many insurers’ planning cycles, and that uncoupling DCAT from the
planning cycle reduces its effectiveness as a management tool. We
clarified the requirement by eliminating a specific timeline for
the annual DCAT and emphasizing that DCAT and stress testing are
complementary processes which each institution needs to complete
in a way which will maximize their benefit, and that more frequent
stress testing supports the integration of the DCAT process with
the finalization of an annual business plan by providing timely
inputs based on current information.
The Guideline Implementation Analysis Statement that accompanied
the draft guideline indicated that OSFI intends to implement the
guideline in late 2009. Industry associations suggest immediate
full implementation of the guideline is not reasonable as it may
require significant investment in infrastructure and information
systems. They suggest that a more reasonable expectation is that
institutions have a plan to move to full implementation over a reasonable
period of time, and that their progress can be measured against
OSFI recognizes that achieving full compliance with the principles
laid out in the guideline may take time for many institutions. As
such, OSFI expects institutions to assess their stress testing practices
against the principles set out in the guideline as soon as practicable
and, where gaps have been identified, that institutions develop
action plans to improve their practices in a reasonable time frame.
Institutions should communicate the results of such assessments
and any action plans to their OSFI relationship manager during the
first half of calendar 2010.
Questions concerning the guideline should be addressed to Aina
Liepins, Capital, Accounting and Research Division, at (613) 991-5555,
by facsimile at (613) 991-6822 or by e-mail at firstname.lastname@example.org.