Office of the Superintendent of Financial Institutions
This guideline outlines the approach the Office of the Superintendent of
Financial Institutions uses in permitting trust and loan companies,
Canadian incorporated life insurance companies and cooperative credit
associations with capital of over $25 million to hold commercial loans in
excess of 5 per cent of the total assets of the company or association
The Trust and Loan Companies Act, the Insurance Companies Act and the
Cooperative Credit Associations Act (referred to hereinafter collectively
as "the Acts" or individually as "the Act") provide full commercial
lending powers to federally registered trust and loan companies, Canadian
incorporated life insurance companies and cooperative credit associations
respectively, subject to certain conditions. These conditions include a
capital base of at least $25 million and supervisory approval by the
Superintendent of Financial Institutions. Companies that do not meet these
conditions are limited to commercial lending activities not exceeding 5
per cent of total assets as defined by regulations. The regulations define
"total assets" to incorporate the assets of a company's prescribed
Supervisory approval by the Office of the Superintendent of Financial
Institutions to engage in commercial lending will be granted only when
certain established and defined criteria are met. The purpose of applying
these criteria is to ensure that companies have the appropriate mechanisms
in place to make, control and monitor a commercial loan portfolio subject
to the prudent person approach.
The Acts define commercial lending for purposes of these expanded powers.
The term "commercial loan" is defined to include not only loans in the
conventional sense but also certain loan substitutes and investments in
debt and equity securities of corporations and unincorporated entities.
The definition does, however, exclude several classes of loans and
investments that are not to be considered commercial loans. These include:
small loans - less than $250,000 to natural persons (these are
essentially consumer loans and will not be subject to portfolio limits
under the Acts);
mortgage loans that are insured or meet certain requirements regarding
certain deposits by a company with another financial institution;
loans and investments in debt obligations directly or indirectly
backed by the guarantee of a government or prescribed international
loans and investments in debt obligations either directly or
indirectly backed by the guarantee of another financial institution or
secured by deposits with any financial institution, including the
investments in debt or equity securities that are widely distributed
within the meaning of the regulations; and
investments in participating shares.
In defining a commercial loan, the Acts define "loan" with a modified
meaning that incorporates close substitutes for loans, such as acceptances
and other guarantees, financial leases, conditional sales contracts,
repurchase agreements, and other similar arrangements.
The Office expects companies to follow sound risk management practices in
the context of commercial lending activities. Approval for expanding
commercial lending beyond the limit of 5 per cent of total assets depends
on the company demonstrating compliance not only with the criteria
established with respect to commercial lending but with all provisions of
the Act, regulations (including capital adequacy tests), and Office
guidelines and rulings.
The approval process will encompass the following elements:
All companies now in excess of the 5 per cent limit or wishing to
exceed the 5 per cent limit are required to submit a request for
approval. Requests will be considered on an institution by institution
For those companies in excess of the 5 per cent limit, transitional
arrangements will be available to allow companies to continue to
operate pending processing of applications.
Approvals will take two forms; general approval without predetermined
limits and approval with predetermined limits.
To obtain approval for commercial lending without a predetermined
limit, companies will need to have a strong capital position, a
consistently sound record of credit management based on a significant
volume of commercial lending business and, through a description of
their commercial lending business plan, their credit risk management
programs, their credit granting and monitoring processes, and matters
related to the other criteria outlined below, exhibit a strong
capacity to manage the risks associated with commercial lending.
Companies seeking to obtain approval beyond the 5 per cent limit which
do not meet all of the conditions described in 4 but which exhibit an
adequate capacity to manage the risks associated with commercial
lending using the criteria outlined below will be permitted to
increase commercial lending activities gradually. When previously
authorized limits are approached these companies may apply for further
increases in authorized limits or may seek approval to conduct
commercial lending without predetermined limit if they meet all of the
conditions described in 4.
Information contained in applications will be confirmed by reference
to the Office's assessment of the company's condition and past
performance obtained through its supervisory activities including
monitoring, analysis and examination processes.
Under normal circumstances previously authorized expanded commercial
lending powers will not be withdrawn. The Office will use its
supervisory processes to ensure that companies follow sound risk
management practices as they relate to commercial lending.
As regulator, OSFI will:
consider requests from institutions with respect to increasing the
approved limits on commercial lending or removing such limits;
establish, maintain and communicate the criteria used to consider such
upon review, provide written approvals where established criteria are
review, through the examination and monitoring process, the commercial
lending activities to ensure compliance with established criteria.
Each application for approval of expanded commercial lending authorities
will be reviewed in light of the criteria outlined below. These criteria
are consistent with those to be applied in approving similar requests from
other types of regulated financial institutions.
A review of the company's current position with respect to:
the existing authorized level of commercial lending activities;
capital adequacy position; and
compliance with the Act, regulations, guidelines and rulings.
An analysis of past experience in credit management including:
volume of commercial lending activity undertaken in the past five
statistics on non-performing loans, provisions, write-offs,
renegotiated reduced rate loans, arrears; and
other asset quality indicators for both commercial and other loans.
An analysis of annual earnings experience segmented by significant type of
business activity (for example the categories used in regulatory reports
filed with the Office) for the previous five year period.
Background information and biographies of key senior commercial loan
officers including information on past experience and areas of
specialization in commercial lending.
A comprehensive business plan indicating the strategic direction of
commercial lending activities, markets and market share targets, forecasts
A description of the credit risk identification and management program.
This program should include the following essential elements:
credit risk philosophy governing the extent to which the company is
willing to assume credit risk;
role of the board of directors and management;
general areas of credit in which an institution is prepared to extend
credit, types of credit facilities, borrowers and geographic areas;
levels of delegation of credit approval, and provisions or write-off
portfolio concentration limits for the following:
(limits should be provided for both the financial institution making the
application and, where appropriate, on a consolidated basis for the
institution and its subsidiaries).
portfolio diversification policies.
A description of the credit process including:
A description of the credit monitoring and control practices including:
portfolio characteristics analysis to track single and associated
groups of counterparties, types of credit facilities, industries and
credit rating systems which define risk rating criteria and rates the
institution's risks accordingly including the classification of
credits as satisfactory, below standard or unsatisfactory;
credit review process outlining the regular monitoring of borrowers
and applicable procedures for re-evaluation and re-rating of credits;
internal credit inspection and audit processes and procedures to
ensure that credit processes are in compliance with the institution's