Guide to Intervention for Federally Regulated Deposit-Taking Institutions (DTI)

On this page

• 1. Introduction
• 2. Roles and responsibilities
• 3. Supervisory objectives and the intervention process
• 4. Legal powers
• 5. Overall Risk Rating and intervention stages
• 6. Stage 0 – Normal (ORR 1-4)
• 7. Stage 1 – Warning (ORR 5)
• 8. Stage 2 – Material (ORR 6)
• 9. Stage 3 – Serious (ORR 7)
• 10. Stage 4 – Take control (ORR 8)
• Appendix – Summary of OSFI's supervisory response by stage

1. Introduction

The Guide to Intervention for Federally Regulated Deposit-Taking Institutions outlines how the Office of the Superintendent of Financial Institutions (OSFI) and the Canada Deposit Insurance Corporation (CDIC) generally work together as materiality in risks escalate for federally regulated deposit-taking institutions that are members of CDIC (institutions).^{Footnote 1}

2. Roles and responsibilities

An institution's board is ultimately accountable for its safety and soundness. The board provides independent challenge, advice, and guidance to senior management on crisis management policies. The board also approves and oversees significant policies, plans, and strategic initiatives that materially impact capital and liquidity, including recovery plans. When an institution is experiencing problems, the board has a heightened role in seeking solutions and overseeing the implementation of corrective actions.

OSFI is Canada's prudential regulator, responsible for regulating and conducting ongoing risk-based supervision of federally regulated financial institutions. Within this context, the Superintendent has the authority to take a wide range of supervisory and regulatory actions.

CDIC is the deposit insurer and resolution authority for institutions. CDIC works with institutions to ensure it has the necessary information to pay out insured deposits and to develop credible resolution plans. These plans describe how institutions could be resolved in an orderly manner while maintaining the continuity of critical financial services and public confidence in the resilience of the financial system. CDIC works closely with OSFI to address concerns about individual institutions. CDIC's engagement intensifies as an institution approaches non-viability, and it takes the lead in resolution at the point of non-viability.

OSFI and CDIC are members of the Financial Institutions Supervisory Committee (FISC). FISC plays a key role in preparing for and responding to Canadian financial system risks or institutional distress by facilitating coordination and information sharing among its members.

3. Supervisory objectives and the intervention process

OSFI supervises institutions with the main objective of promoting sound risk management and determining whether they:

• remain in sound financial condition
• comply with relevant statutes and supervisory requirements
• have adequate policies and procedures to protect themselves against threats to their integrity and security, including foreign interference

Business as usual supervision

OSFI carries out regular monitoring to assess the financial condition and operating performance of institutions. Metrics provide quantitative reference points that help OSFI calibrate its response, particularly in the context of financial risk.

To inform its risk assessment, OSFI monitors performance against legal and regulatory requirements as well as supervisory expectations. OSFI will also assess whether an institution has developed appropriate policies, procedures, and targets to address risks in a manner proportional to its business and whether it adheres to them, thereby operating within its established risk appetite.

To support risk monitoring efforts, OSFI considers a variety of other inputs, including publicly available information, the work of an institution's own risk oversight and assurance functions, and inputs from other regulators or government agencies.

OSFI also undertakes more detailed reviews that can be prompted by a variety of factors, including macroeconomic risks, thematic risk priorities across several institutions, or specific concerns about a particular institution.

Intervention

The primary goal of the intervention process is to detect and address significant issues at institutions before they escalate. This proactive approach helps:

• protect depositors and creditors
• limit CDIC's exposure to loss in the event of institutional failure
• promote financial system stability in Canada and avoid more disruptive intervention later

The intervention process is flexible and adaptable, and the guide does not limit or prescribe intervention activities. OSFI and CDIC base decisions on the assessment of each case's specific circumstances.

OSFI may intervene earlier or later than outlined in the guide and with different tools, depending on the situation. In line with its risk appetite, OSFI may act sooner if there is a higher risk that a troubled institution could affect other institutions or the broader Canadian financial system.

In deciding how to intervene, OSFI considers an institution's willingness and ability to address identified concerns. OSFI targets outcomes that solve immediate problems as well as root causes.

When OSFI and CDIC communicate with institutions, this information is confidential. This allows OSFI and CDIC to engage early and fully with institutions needing remedial actions, while ensuring that supervisory interactions do not undermine public confidence in institutions.

4. Legal powers

The financial institution statutes^{Footnote 2} give OSFI a wide range of discretionary tools that it can use to address issues at institutions. Depending on the situation, OSFI can use these tools at various points in the intervention process.

Among these tools, the financial institution statutes give the Superintendent the power to:

• enter into a prudential agreement with an institution for the purposes of:
  • implementing any measure designed to maintain or improve its safety and soundness
  • establishing adequate policies and procedures to protect the institution against threats to its integrity or security
• disqualify proposed new directors and senior officers based on suitability
• remove directors and senior officers based on suitability
• order an institution to increase its capital or to provide additional liquidity
• impose business-related conditions or limitations on an institution's Order to Commence and Carry on Business
• issue a direction of compliance, directing an institution to:
  • cease or refrain from conducting certain unsafe or unsound business practices and to take remedial actions
  • take any measures needed to establish adequate policies and procedures to protect itself against threats to its integrity or security

OSFI can also impose monetary penalties for late and erroneous regulatory filings as well as for breaches of specific provisions of the financial institution statutes.

If issues at an institution are serious enough and the institution has been unable to adequately address them, the Superintendent also has discretionary authority, under conditions set out in the financial institution statutes, to take control of the institution or its assets, to trigger the conversion, or to write-off of certain capital instruments.

CDIC has a range of tools that it can use to support its preparedness to resolve an institution, including:

• setting requirements regarding the data capabilities, to facilitate an orderly resolution
• compelling institutions to provide CDIC with certain prescribed information to prepare for or execute a resolution
• conducting special or preparatory examinations of the institution, supporting timely and informed decisions around possible resolution actions
• providing financial assistance to the institution or a buyer, such as recapitalization, asset purchases and guarantees, and funding and liquidity support
• cancelling or terminating deposit insurance

Once an institution is no longer viable, CDIC can use a number of resolution tools to protect depositors and contribute to the stability of the financial system.^{Footnote 3} For more information about resolution, see What happens in a failure — CDIC.

5. Overall Risk Rating and intervention stages

OSFI's Supervisory Framework is designed to respond quickly to the most serious risks facing an institution. OSFI assigns an Overall Risk Rating (ORR) on an eight-point scale to all institutions. The ORR reflects the level of risk to the viability of an institution.

OSFI assigns each institution an intervention stage based on its ORR. Institutions can move between stages at any time, depending on OSFI's ongoing risk assessment. If an institution successfully remediates significant issues and no new concerns emerge that affect its risk profile, OSFI will update its assessment and move the institution to a lower stage. Once an institution achieves the expected supervisory outcomes associated with intervention conditions, OSFI will return it to Stage 0.

OSFI will send a formal letter to the institution's chief executive officer and board of directors notifying them of any change to the assigned Intervention Stage Rating. This letter outlines the expectations OSFI has for the institution to decrease its Intervention Stage Rating as well as the conditions that could lead to an increased Intervention Stage Rating. OSFI will also meet with the institution's senior management, the board (or a board committee), and often the external auditor to explain the concerns and discuss remediation.

OSFI will also levy an additional fee, in the form of an assessment surcharge, on institutions with a stage rating of 1 or higher, and will communicate this surcharge to them.

CDIC's Differential Premiums System classifies institutions into one of five premium categories based on the institution's risk profile as determined by a scorecard that takes into consideration quantitative and qualitative factors. OSFI's Intervention Stage Ratings and ORRs are key inputs. More information can be found in the Differential Premiums Manual.

6. Stage 0 – Normal (ORR 1-4)

OSFI typically assigns a Stage 0 rating to an institution when it has determined that an institution is resilient to most normal adverse business and economic conditions, despite deficiencies or control weaknesses identified. Additionally, OSFI is satisfied that an institution has, and is adhering to, adequate policies and procedures to protect against threats to its integrity or security despite deficiencies or control weaknesses identified.

ORR 1 indicates minimal risk, typically associated with strong controls and a low level of underlying risk exposure. With an ORR 2, we might have identified deficiencies, but overall, our risk assessment of the institution is low. An ORR of 3 represents moderate risk levels, where an institution in this range remains resilient but may have identified deficiencies or be operating in a heightened risk environment. An ORR of 4 is described as Watchlist to signal that identified issues require prompt attention, otherwise an institution is likely to be subject to supervisory and/or statutory intervention. ORRs of 1 through 4 are within OSFI's risk tolerance.

As risks heighten—whether due to internal weaknesses or external conditions—ORRs could deteriorate to reflect the increased risk exposure. OSFI expects institutions to remediate findings and continuously strengthen resilience. This discipline will reduce the risk of escalation above Stage 0.

Supervisory response

At Stage 0, OSFI reviews the recovery plans of systemically important institutions to assess their ability to respond effectively to severe stress and maintain the confidence of depositors and creditors. Recovery plans for smaller institutions are not systematically reviewed at Stage 0 but are assessed at higher stages.

OSFI's stated risk appetite reflects a bias toward action and a preference for agility over perfection, allowing it to act quickly on imperfect information where necessary. At Stage 0, OSFI generally has the time to gather sufficient information before deciding whether action is needed.

In addition to ongoing discussions with senior management and boards, OSFI communicates with institutions through formal letters. These letters emphasize important themes and include supervisory findings and recommendations when necessary.

OSFI expects institutions to provide detailed action plans in response to supervisory concerns. OSFI tracks the progress of remediation activities and escalates intervention when an institution does not achieve satisfactory outcomes. OSFI sets and communicates expected timelines for addressing more material issues.

At any point in the supervisory process, actions may include risk-based changes to institution-specific supervisory limits or expectations. Examples include:

• increasing supervisory capital targets, including an institution's authorized leverage ratio
• revising liquidity targets, such as requiring more liquid assets through a higher liquidity coverage ratio and/or extending the survival horizon of the net cumulative cash flow

OSFI often uses supervisory influence, or moral suasion, to encourage corrective action. Moral suasion relies on the strength of OSFI's authority, credibility, and relationship with an institution.

OSFI is ready to use formal intervention powers if an institution does not remediate supervisory concerns satisfactorily or within a reasonable amount of time.

Coordination

OSFI provides CDIC with copies of supervisory letters and its risk assessments. OSFI and CDIC discuss institutions of concern at regular touchpoints and share information about any remediation activities expected of an institution.

OSFI maintains regular contact with foreign regulators and supervisors that have responsibilities relating to an institution. These relationships are typically governed by confidentiality agreements. The frequency and depth of engagement depend on the level of risk and the importance of the operations. When issues arise outside of Canada, OSFI works closely with the relevant foreign authorities.

OSFI and CDIC jointly lead international crisis management groups (CMGs) for Canadian systemically important banks (SIBs). CMGs are designed to strengthen preparedness and support the coordinated management and resolution of a cross-border financial crisis involving a specific institution. CMG members include prudential regulators, supervisors, and resolution authorities from countries where the institution has a significant presence.

OSFI also participates in supervisory colleges that include home and host supervisors. Home supervisors are responsible for the supervisory oversight of an institution on a consolidated basis. Host supervisors oversee specific entities within the group that operate in their jurisdictions. Together, home and host supervisors form a supervisory college to:

• assist members in developing a better understanding of the risk profile and vulnerabilities of a financial institution with international operations
• provide a framework for addressing key topics that are relevant to the supervision of the group
• promote broader cross-border cooperation and coordination

Although supervisory colleges meet periodically, typically more frequently for systemically important institutions, members collaborate and share information on an ongoing basis.

CDIC's response

CDIC's ongoing risk monitoring and preparedness activities include:

• administering and monitoring the deposit insurance framework
• monitoring and assessing institutions' financial strength and viability
• assessing resolution plans prepared by domestic SIBs
• monitoring compliance with the Canada Deposit Insurance Corporation Act, regulations, and CDIC by-laws

7. Stage 1 – Warning (ORR 5)

OSFI typically places an institution at Stage 1 when there are warning signs of safety and soundness concerns that could affect an institution's viability, concerns with its ability to protect itself against threats to its integrity or security, or a combination of these concerns.

At Stage 1, OSFI does not expect the potential impact to viability to occur within two years based on available information. In the context of integrity and security, OSFI focuses more on an institution's ability to address concerns and on the potential materiality of concerns, rather than on the impact's time horizon.

OSFI can downgrade an institution from Stage 0 to Stage 1 when significant new concerns emerge or as an escalation response following a failure to remediate previous issues. Conversely, an institution can be upgraded to Stage 1 from a higher stage after remediating more serious issues associated with a higher Intervention Stage Rating.

OSFI evaluates an institution's performance by considering both current and expected future conditions. OSFI's response will vary depending on whether the stress is specific to an institution or part of a broader, system-wide issue.

Examples of concerns that could lead to a Stage 1 rating include:

• expectation of unsatisfactory profitability that may have an impact on financial resilience in the medium term
• concerns about the adequacy of capital or liquidity, such as a breach of an institution's Pillar 2 capital expectations, indications that an institution may be unable to maintain or restore its internal liquidity targets, or weaknesses in risk management practices relating to financial resilience
• the inability to deliver critical operations through disruption, especially if there is evidence of an escalating trend or underlying risk management deficiencies that are expected to have an impact on financial resilience
• deficiencies in risk governance that could present a material risk to an institution's viability, security, or integrity if not addressed and a risk culture which undermines sound decision-making, prudent risk-taking and effective risk management
• isolated statutory or regulatory non-compliance that does not present an immediate risk to the viability, security, or integrity of an institution, and is expected to be remediated within an acceptable timeframe
• inability to evidence adequate policies and procedures to protect against threats to integrity or security and inability to remediate those deficiencies in a timely manner

OSFI will have greater concern if an institution also has business model issues that indicate a weaker ability to recover from stress, such as reliance on unrealistic business plan assumptions or a failure to adapt to changes in the operating environment.

A range of factors typically influence ratings. Depending on how material the issues are, the examples above could result in a more negative rating outcome.

Supervisory response

Supervisory intensity increases for an institution at Stage 1. In addition to activities identified in earlier stages, an institution should expect more frequent and detailed information requests, followed by closer and more frequent supervisory follow-ups. OSFI will also focus on the adequacy of an institution's liquidity and capital on a going concern basis as part of its enhanced monitoring and may put in place restrictions on capital distributions.

OSFI may undertake additional reviews or direct an institution to engage a suitable third party to focus on areas of concern. Depending on the situation, it can also appoint an on-site monitor.

OSFI will ask an institution to provide a recovery plan if this has not been done already and will reassess an institution's crisis governance and recovery plan in the context of the stress situation. Where necessary, OSFI will ask an institution to add more details or make other updates to the plan.

If the stress event becomes severe enough that an institution transitions from crisis preparedness to crisis management, OSFI will assess the resources that an institution has to withstand the stress event. These resources will appear in capital, liquidity, or operational contingency plans.

The adequacy of these resources and their depletion rate determine the length of the recovery "runway" available to an institution. The runway is the amount of time an institution has to recover before becoming nonviable. Monitoring thresholds help OSFI understand if an institution is operating within the expected runway and allow prompt escalation when necessary.

At Stage 1, OSFI will typically continue to use its influence by escalating communication and engagement with an institution rather than using formal intervention powers. This approach helps maintain a constructive dialogue while driving meaningful change.

Coordination

OSFI will notify CDIC when it stages an institution, providing the rationale for the decision and outlining any planned supervisory actions. OSFI and CDIC will engage in frequent meetings to discuss an institution's risk profile. In turn, CDIC will inform OSFI if it intends to take any action described below that would impact an institution.

FISC receives regular updates about institutions that are at Stage 1. Where a supervisory college exists, it is also likely to meet more frequently as risks escalate.

CDIC's response

In addition to its ongoing risk monitoring and preparedness activities, CDIC may:

• classify an institution as higher risk, which in turn drives enhanced preparedness actions and may impact the classification of an institution for differential premium purposes
• request additional information from an institution to support resolution preparedness, including the preparation of non-SIB resolution plans
• enhance monitoring of compliance with the Canada Deposit Insurance Corporation Act, regulations, and CDIC by-laws, as needed
• levy a premium surcharge in certain circumstances

8. Stage 2 – Material (ORR 6)

OSFI typically places an institution at Stage 2 when there are material safety and soundness concerns that could affect an institution's viability, when it has evidenced a failure to protect itself from threats to its integrity or security, or a combination of these concerns.

At this rating level, OSFI does not expect safety and soundness concerns to have an immediate impact on an institution's viability. However, if issues remain unaddressed, that viability could be at risk within two years.

In the context of integrity and security, the failure to safeguard against threats may not have led to material impacts on an institution's safety and soundness yet, but the likelihood and potential impact of the failure require timely remediation by the institution.

OSFI can downgrade an institution to Stage 2 from Stage 0 or Stage 1 if new material concerns emerge or as an escalation following a failure to remediate issues previously identified at Stage 1.

Examples of concerns that could lead to a Stage 2 rating include:

• a major loss of business (for example, originators or customers)
• reputational damage that erodes depositor or counterparty trust that could trigger a run on the institution or broader loss of public confidence
• a material and persistent breach of Pillar 2 capital expectations with an unclear plan to restore
• an unexpected funding event (for example, removal or suspension from a major deposit board, a pattern of large or consistent deposit withdrawals, or the failure of a debt or capital issuance)
• inability to deliver on critical operations for a prolonged period of time having an immediate and material impact on financial resilience
• a persistent breach of board-approved limits without appropriate corrective action
• isolated statutory or regulatory non-compliance that, if unaddressed within expected timelines, could lead to a material disruption of operations, loss of confidence in an institution, or other material impacts on an institution and/or its stakeholders
• persistent non-compliance with statutory or regulatory requirements coupled with significant doubts regarding an institution's ability to remediate raises material concerns about the viability, security, or integrity of the institution
• failure to protect an institution from threats to its integrity or security due to significant deficiencies in the institution's policies, procedures, systems, or governance, has had, or is significantly likely to have, a material negative impact on the operations of the institution
• persistent governance failings that could present a material risk to an institution's viability, security or integrity if not addressed and a risk culture that does not prioritize remediation of shortcomings
• an institution has evidenced a non-severe risk to national security that is not expected to increase in severity and that the institution can address promptly

Depending on severity, these concerns, along with a failure to adequately address them in a timely manner, could also lead an institution to be categorized as Stage 3.

Supervisory response

At Stage 2, there is a significant increase in supervisory intensity and engagement with an institution's board. In addition to activities identified in earlier stages, OSFI will conduct scenario analyses for both going-concern and gone-concern situations and set clear expectations for the timely and effective resolution of its concerns. Because in Stage 2 there may exist safety and soundness concerns that could materially affect an institution's viability, OSFI may apply Pillar 2 capital and/or liquidity buffers.

OSFI will further increase its monitoring activities, including detailed liquidity, funding, and capital analyses, and an assessment of an institution's crisis management activities.

OSFI may also appoint a third-party monitor to undertake increased oversight of areas of concern such as statutory and regulatory compliance or robustness of policies and procedures to protect against threats to integrity or security.

OSFI may require an institution's external auditor to expand the scope of its audit work or to carry out additional activities to gather more information.

At Stage 2, OSFI may advance its preparedness to take control of an institution or its assets in the event of a rapid deterioration.

While OSFI may still use moral suasion at Stage 2, the elevated level of risk means that it is prepared to use formal intervention powers if an institution does not respond satisfactorily to concerns.

As described in Section 4, OSFI can remove directors and senior officers, impose business restrictions, and order an institution to increase its capital or maintain additional liquidity. OSFI can also direct an institution to take, or refrain from taking, certain actions by issuing a direction of compliance. For example, if OSFI determines that an institution is not responding adequately to a major operational disruption, it could issue a direction of compliance to engage a third-party expert or take other corrective actions.

Coordination

OSFI and CDIC will exchange findings and data from enhanced supervisory reviews, increased monitoring, expanded audits, and any special or preparatory examinations. Both agencies will begin preparing joint contingency plans, incorporating input from other FISC members. As needed, OSFI and CDIC will engage foreign regulators in this process, including through CMGs. In some cases, this contingency planning may start as early as Stage 1.

CDIC's response

In addition to pursuing the activities referenced at Stage 1, CDIC may further enhance its preparedness to resolve the institution. This could involve a heightened focus on ensuring the institution promptly addresses any deficiencies that could impact an orderly payout or resolution.  

In consultation with OSFI, CDIC may carry out a special and/or preparatory examination if it determines that a resolution may be necessary in the near term.

9. Stage 3 – Serious (ORR 7)

OSFI typically places an institution at Stage 3 when severe safety and soundness concerns put an institution's future viability in serious doubt, when an institution demonstrates persistent and significant failures to protect itself from threats to its integrity or security, or a combination of these concerns. 

At this rating level, safety and soundness concerns could threaten viability within a year. In the context of integrity and security, failures require urgent correction due to their potential severity and likelihood of impact.

OSFI can move an institution from Stage 2 to Stage 3 if concerns escalate. An institution can move directly to Stage 3 based on the severity of concerns or if serious concerns materialize suddenly.

Examples of concerns that could lead to a Stage 3 rating include:

• significant doubt about an institution's capacity to restore its capital or liquidity positions, including where sustained losses or underlying business model viability issues impede recovery
• threats to solvency, which may include a material breach of a Pillar 1 capital buffer with an unclear path to restore
• a breakdown in corporate governance that threatens or impedes recovery
• significant uncertainty about an institution's ability to execute its recovery plan
• non-compliance with statutory or regulatory requirements that requires urgent correction to avoid a material disruption of operations, loss of confidence, or other material impacts to an institution and/or its stakeholders
• failure to protect an institution from threats to its integrity or security has had, or is significantly likely to have, a material impact on the operations of the institution that requires urgent correction
• an institution has evidenced a potentially material risk to national security that is not expected to increase in severity and that the institution can address promptly

Supervisory response

OSFI will take additional steps to address the serious risks presented at Stage 3. Further actions could include tightening existing supervisory restrictions and putting OSFI staff or agents on-site to monitor developments in real time. Further, OSFI may engage a third party to support liquidation analysis work to inform intervention thresholds, which would require more detailed reporting from an institution. OSFI may also bring in external experts to assess specific areas, such as loan security quality, asset values, or reserve adequacy.

OSFI will expand contingency planning to prepare for a range of possible outcomes, which may include gone concern. OSFI will also engage directly with an institution's senior management and board to communicate thresholds for future intervention and emphasize the need to consider resolution options, such as restructuring, asset sales, or finding a potential buyer.

OSFI will adjust these intervention thresholds if there is a change in circumstances, such as an unexpected and sudden deterioration.

If an institution breaches its capital buffers, OSFI will expect the institution to implement a capital restoration plan to rebuild buffers within a timeframe that is acceptable to OSFI. If an institution can correct the breach promptly, the plan should demonstrate how the institution will restore and maintain the capital buffer on a sustained basis. OSFI could establish a minimum capital floor, falling below which may cause the Superintendent to declare non-viability or take control of the institution.

OSFI's capital framework puts in place capital distribution constraints on an institution when capital levels fall within the buffer conservation range. The limits apply automatically and increase as an institution's capital levels approach the minimum requirements. As outlined in the Capital Adequacy Requirements Guideline, the capital conservation buffer establishes a safeguard above the minimum capital requirements. Capital constraints also apply to SIBs if they breach either the SIB surcharge or leverage ratio buffer.

Coordination

At Stage 3, OSFI and CDIC are communicating frequently based on the level of concern and potential impact on the Canadian financial system. FISC plays a central role in supporting a coordinated federal response, providing a structure for collaboration among agencies at the working level. OSFI also keeps other relevant regulators informed, subject to information-sharing provisions, to support a well-aligned and coordinated approach.

CDIC's response

When an institution is at Stage 3, CDIC may take additional steps to support a potential resolution and prevent the institution from moving to Stage 4. CDIC may take such steps if doing so would promote or otherwise contribute to the stability of the financial system in Canada, protect depositors, and minimize CDIC's exposure to loss. Such steps could include providing financial assistance to the institution or a third party interested in acquiring it. This support may include, among other things^{Footnote 4}, one or more of the following:

• acquiring assets from the institution
• making or guaranteeing loans to the institution, with or without security
• making or guaranteeing a deposit with the institution
• acquiring subordinated debt or shares of the institution
• entering into loss-sharing or deficiency coverage agreements with a buyer

CDIC can also cancel the deposit insurance policy if an institution is about to become insolvent or ceases to accept deposits. This decision is taken after notifying the Minister and Superintendent and considering the Minister's view.

Similarly, if CDIC determines that an institution is not complying with the Canada Deposit Insurance Corporation Act (CDIC Act), regulations, or one of CDIC's by-laws, including the Deposit Insurance Policy by-law, it can initiate the process to terminate the institution's deposit insurance, unless the Minister advises CDIC that doing so is not in the public interest.^{Footnote 5}

10. Stage 4 – Take control (ORR 8)

OSFI will assign a Stage 4 rating if the statutory conditions for taking control are met or will be met in a short period of time. This includes situations where OSFI determines that an institution is experiencing severe financial difficulties, the continued operation of an institution by its existing board or senior management would be materially prejudicial to its integrity and security or would pose a risk to national security, or a combination of these situations.

At this stage, the institution has demonstrated that it lacks the will or ability to rectify the situation on an immediate basis.

Examples of concerns that could lead to a Stage 4 rating include:

• excessive dependence on outside assistance to sustain an institution's operations, including loans, advances, guarantees, or other assistance
• an institution has lost the trust of depositors or other creditors and the public, which may be characterized by ongoing or increased difficulty in, or loss of, obtaining or rolling over short-term funding
• capital has declined to a level or eroded in a manner that may detrimentally affect an institution's depositors and creditors
• an institution, or its parent company, is insolvent, or about to become insolvent
• any asset appearing on an institution's books or records or held under its administration is not, in the opinion of the Superintendent, satisfactorily accounted for
• an institution has failed to comply with a capital order of the Superintendent
• failure to protect an institution from threats to its integrity or security has led to material and sustained impact on the institution's operations and the institution lacks the ability or willingness to address the issue promptly
• an institution has evidenced a risk to national security
• the Minister has directed that all the shares of the institution be divested and/or the voting rights of the shares have been restricted
• any other situation where the Superintendent is of the opinion that the interests of an institution's depositors and creditors may be materially prejudiced

Supervisory response

When the statutory conditions exist and OSFI has given an institution a reasonable opportunity to make representations, the Superintendent may:

• take control of an institution or its assets and the assets under its administration and if necessary, request that the Attorney General of Canada apply for a winding-up order, unless the Minister advises that doing so is not in the public interest
• report to CDIC that an institution is, or is about to become, non-viable or that the grounds for taking control are met, which could result in a CDIC-led resolution

In appropriate circumstances, the Superintendent may trigger the conversion or write-off of non-viability contingent capital instruments, where this could restore viability, usually in combination with additional measures.

Coordination

FISC members will meet as required, focusing on the coordinated implementation of intervention and resolution measures.

CDIC's response

CDIC may apply one or more of its resolution tools, following the established process and in coordination with other federal agencies. CDIC's tools are not confined to closing an institution and reimbursing insured deposits. They include powers to support:

• a sale of shares or assets
• amalgamation with another institution
• establishing a bridge institution to operate an institution's business until one or more buyers can be found
• recapitalization (including via bail-in if the institution is a SIB, which involves converting certain long term debt instruments into equity)
• restructuring or other private solutions

When selecting an appropriate resolution tool, CDIC considers all aspects of its mandate.

While an institution is in resolution, OSFI monitors it to assess its financial condition and compliance with its governing statute and supervisory requirements under that statute. OSFI reports to the Minister and CDIC.

If CDIC believes that an institution is insolvent or about to become insolvent, it can request that the court begin formal winding-up proceedings under the Winding-up and Restructuring Act. For further information, see What happens in a failure — CDIC.

Appendix – Summary of OSFI's supervisory response by stage

In addition to the powers and actions listed in preceding stages, OSFI will typically take the following supervisory actions or exercise the following legal powers at each stage. This list is illustrative, non-exhaustive, and not binding on OSFI.