Document Properties
- Type of Publication: Guideline Impact Analysis Statement
- Date: December 2009
- No: E-18
- Audiences: Banks / BHC / T&L / Co-op / Life / P&C / IHC
I. Background
Stress testing is an integral component of the risk identification
and risk management processes of financial institutions including
the Internal Capital Adequacy Assessment Process (ICAAP) for deposit-taking
institutions and Dynamic Capital Adequacy Testing (DCAT) processes
for insurers. Events in financial markets during the last two years
have highlighted the importance of rigorous and actionable stress
testing programmes. Experience has shown that stress testing did
not always include events considered to be unlikely or extreme,
or events for which no historical data exists.
II. Problem Identification
OSFI’s experience and that of other regulators indicates that
many financial institutions, to varying degrees, need to improve
their stress testing programmes with respect to timeliness, identifying
the interaction of risks and severity of stresses chosen.
III. Objectives
OSFI would like to establish a standard against which stress testing
programs can be evaluated and to ensure the principles apply equally
to all regulated financial institutions. OSFI would also like to
address the need for improvements in the DCAT and stress testing
in insurance companies generally. At the same time, OSFI desires
to have guidance that is consistent with and embodies the principles
included in the Basel Committee’s May 2009 guidance, Principles
for sound stress testing practices and supervision.
IV. Identification and Assessment of Options
Option 1 – Rely solely on existing international guidance
The advantage of this option is that OSFI would not have to devote
resources to developing its own guidance on stress testing.
However, the most recent stress testing guidance, which was issued
by the Basel Committee on Banking Supervision, has a banking focus
that does not address insurance risks. Further, international guidance
cannot always reflect the Canadian marketplace and regulatory environment.
Option 2 – Develop common guidance applicable to the deposit
taking and insurance sectors
The advantage of this option is that it establishes common principles
and standards for both deposit taking and insurance institutions,
placing all institutions on an equal footing.
The challenge with this option is the need to develop principles
and standards that appropriately reflect the particularities of
the two sectors. However, the high level principles apply to both
sectors, and sector specific material can be included in the discussion
of the principles, for example discussions of DCAT–related issues.
Option 3 – Develop separate guidance for the insurance and banking
sectors
This option would allow for guidance to be specifically tailored
to each of the insurance and deposit taking sectors. However, this
would result in a duplication of effort because the same underlying
principles apply to the insurance and banking sectors. Further,
this option diverges from OSFI’s desire to apply similar guidance,
where appropriate, to the different financial sectors.
V. Recommendation
Given that broadly the same principles and standards for stress
testing apply to both the deposit taking and insurance sectors,
and OSFI’s desire to have common guidance for all sectors where
appropriate, OSFI is of the view that the creation of common guidance
is the most appropriate option for ensuring sufficiently robust
guidance is available to financial institutions. Further, sole reliance
on international guidance does not necessarily take into consideration
factors that may be unique to the Canadian marketplace or regulatory
environment.
VI. Consultations
OSFI issued the draft version of the guideline for comment on
August 26, 2009. The main focus of comments received was on the
timing of DCAT and when full compliance with the guideline would
be expected.
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 end. Commenters pointed out that requiring
DCAT to be completed within six months of year end does not mesh
well with insurers’ planning cycles, and that uncoupling DCAT from
the planning cycle would reduce its effectiveness as a management
tool. As a result, we removed this requirement and replaced it with
a requirement that DCAT be integrated with the business planning
process.
The GIAS accompanying the draft guideline stated that it was OSFI’s
intent to implement the guideline by year end 2009. Many commenters
interpreted this to mean that OSFI would expect full compliance
with the guideline by year end 2009. The cover letter accompanying
the final guideline clarifies that we expect institutions to assess
their stress testing programs against the principles set out in
the guideline and develop a plan to achieve compliance within a
reasonable timeframe.
A number of minor changes were also made to the guideline in response
to comments requesting clarification.
VII. Implementation & Evaluation
OSFI will continue to assess institutions’ stress testing programmes
as part of the supervisory review process, including its reviews
of the ICAAP and DCAT. These assessments will take into consideration
whether the institutions are incorporating the principles outlined
in Guideline E-18 into their risk identification and risk management
processes.