Consultation summary report

CCUA, Desjardins, Libro, Meridian, Talka

Stakeholders are supportive of a risk-based methodology that ensures adequate premium differentiation based on credit unions' risk profiles.

FSRA would like to thank stakeholders for their support and feedback on the proposed Differential Premium Score (DPS) methodology.

Libro

Stakeholder commented that deposit insurance is an important element of the sector’s resilience and is important in protecting owners (depositors) as they do business with credit unions.

Meridian

Stakeholder specifically noted its understanding of FSRA’s approach in utilizing the Overall Risk Rating (“ORR”) in the DPS and FSRA’s overall shift to principles-based oversight.

CCUA

Stakeholder challenged the importance of using a 70/30 split as an initial weighting, expressing the hope that this was proposed as a jumping-off point and FSRA is open to considering something that is more aligned to other regimes in Canada. The stakeholder specifically referenced the Canada Deposit Insurance Corporation (CDIC) 40/60 [corporate governance/capital] split. The stakeholder provided its view that FSRA's 70/30 weighting would affect competitiveness and the ability of sector to absorb the new framework. The stakeholder asked that FSRA consider aligning with CDIC in setting the initial weighting to 40/60.

CDIC’s current and proposed^[1]. Differential Premium System is based upon qualitative (40% weighting) and quantitative (60% weighting) assessments. Qualitative assessments are based on reviews of member institutions conducted by OSFI (current 35%; proposed^[1] 25%) and other information independently determined by CDIC (current 5%; proposed^[1] 15%). Quantitative criteria consist of eleven financial metrics that consider risk factors such as capital adequacy, earnings and asset quality (current and proposed 60% in aggregate). CDIC is proposing to decrease the weightings of capital adequacy metrics based on leverage (currently 10%; proposed^[1] 5%) and Tier 1 capital (currently 10%; proposed^[1] 5%); the reduction in weighting would be offset by a proposed introduction of funding and liquidity metrics.

The CDIC metrics reflect the financial condition of a member institution derived from financial statements and regulatory returns as required by OSFI. FSRA considers that until such time as enhanced data is provided by credit unions and metrics can be assessed over time, it would be inappropriate to consider similar discrete financial metrics or weightings to calculate DPS premiums.

Although FSRA's proposed weightings differ from those used (or proposed) by CDIC, determination of a credit union's ORR under the RBSF includes the calculation and assessment of many quantitative financial metrics (in addition to capital metrics) as supervisors assess inherent risks, liquidity risks and a credit union's resilience. These financial metrics include: liquidity ratios, earnings, lending portfolio metrics (TDSR, GDSR, delinquencies, loan losses, etc.), balance sheet and income statement comparatives. FSRA does not consider the proposed DPS methodology or RBSF would affect the competitiveness of an individual credit union or the credit union sector.

CCUA

Stakeholder commented that to reduce a potential barrier to entry, some jurisdictions create 'grace periods' for new credit unions or take a graduated approach to risk-based pricing, assessing a low premium initially and raising it in small increments until it reflects the institution’s risk. The stakeholder asked if FSRA would be open to incorporating this factor in its DPS regime?

FSRA is not aware that deposit insurance premiums are or have been potential barriers to entry for new credit unions. FSRA notes that pursuant to Section 227 of the CUCPA 2020, it may, upon such conditions as it may direct, defer the collection of, or cancel, all or part of an annual premium assessed to a credit union by the Authority. FSRA would consider these provisions on a case by case basis to assess any request if received, having regard for the potential impacts on the sector and its members.

Desjardins

Stakeholder commented that harmonizing the maximum deposit amount insured by the DIRF with the amount insured by CDIC could strike the right balance and make FSRA's funding targets more easily achieved.

The rationale for the proposed methodology is to link the risk profile of an individual credit union with the level of deposit insurance premiums paid by that credit union, where corporate governance is assessed and measured through the newly introduced RBSF and capital metrics are consistent with the Capital Adequacy Rule. The intent of the proposed methodology is not to reduce the maximum insured amount of an eligible deposit or advance the timing by which a DIRF funding target is achieved. Any changes to the deposit insurance limits would be made in the legislation which is under the responsibilities of the Ministry of Finance.

Desjardins

Stakeholder commented that the proposed corporate governance component at 70% and capital at 30% would be the inverse of the weighting used by CDIC; the corporate governance component could be overweighted and as a result devalue the importance of the capital requirement.

The nomenclature in the proposed methodology, "corporate governance" and "capital", is to align with the formula contained in section 110 of Ontario Regulation 105/22. FSRA does not plan to request any amendments to the Regulation as a result of the proposed methodology. In addition, the 70% weighting is not only corporate governance: corporate governance and other oversight functions plus other factors like risks, capital, liquidity, resilience, and quantitative metrics are all included in the 70% weighting.

As noted within the RBSF Guidance, quantitative assessments are important components of the framework. FSRA highlights that the Guidance states (a) supervisors combine sufficient quantitative and qualitative evidence to support judgments, findings, recommendations, and requirements (refer page 5); (b) FSRA uses quantitative and qualitative measures in the assessment of a CU’s liquidity adequacy and liquidity management programs (page 12) and (c) Intervention Levels are determined among other things based on a CU’s sound financial position, sufficient governance and risk control frameworks and reference to Early Warning System (EWS) financial ratios (Appendix C).

The proposed weightings for corporate governance (70%) and capital (30%) reflect the better tools available to FSRA under the RBSF and new FSRA Rules. As noted in a previous response, CDIC currently weights the Capital components at 20% (proposed to be lowered to 10% of total weighting), therefore the proposed 30% discrete weighting for capital in FSRA's proposed methodology is higher than CDIC's weighting. The corporate governance weighting recognizes that in many cases it is non-capital issues that weaken and lead financial institution to failure. The ORR provides a comprehensive, accurate and consistent rating of the risk profile of a credit union; hence it is the best indication of how likely it is for the credit union to fail and adversely impact the sector and the DIRF.

When enhanced data is provided by all credit unions and assessed by FSRA, FSRA will consider whether it would be prudent to incorporate discrete financial metrics in addition to the proposed capital ones to calculate DPS scores.

Libro

Stakeholder also commented that the change to 70% DPS level and 30% capital is a concern due to the extent to which the ORR is impacted by qualitative factors determined through a relatively new process. The stakeholder asked that a greater proportion of the weighting be based on quantitative and less-subjective elements or there be more transparency into the calculation of the ORR.

Meridian

Stakeholder stated it supported the shift to using the ORR metric as an input into insurance premium calculations. However, it noted the increased weighting placed on this input versus capital metrics for the purpose of calculating the Differential Premium B score. The stakeholder commented this represents a change from the weightings placed on governance versus capital inputs in current calculation; therefore, placing less reliance on objective criteria. It therefore asked FSRA to consider whether it may be more appropriate to incorporate the ORR metric into the DPS with weightings more consistent with the current approach.

Desjardins

Stakeholder commented that when determining a DPS Level, FSRA should consider a credit union's risk profile and financial strength and its relationship with affiliates.

The DPS Level is determined using the credit union’s ORR and its Intervention Level, each taken from the RBSF. The ORR represents the overall risk profile of the credit union, after considering the impacts of capital (including earnings), liquidity, and resilience on a credit union's Summary Residual Risk rating. Supervisors perform an overall assessment of the credit union and FSRA's supervisory work results in a consolidated assessment of risks in the business of the credit union. This holistic approach includes assessment of all material credit union entities such as subsidiaries, joint ventures, and other material investments and activities.

Libro

Stakeholder commented it was able to understand the DPS methodology as articulated but it was difficult to comment on whether the methodology effectively supports the RBSF at this time, as it has not completed an RBSF-based examination.

FSRA acknowledges this concern and considers it is mitigated by the transition period. Transition provides credit unions time until all have been assessed under RBSF to become familiar with the RBSF and address any observed deficiencies. During transition, premiums paid will be the lower of the amount calculated based on RBSF or the existing methodology.

Libro

Stakeholder commented that it fully supports a transition period and in addition to regular communication with relationship managers, TAC should be regularly convened to ensure smooth transition and comprehension of FSRA's expectations.

FSRA appreciates the comments which are aligned with its plans for regular communication and periodic meetings of the TAC as well as sector wide communications.

Additionally, this stakeholder believes the best approach would be to transition the ratings slowly over time towards the revised weightings, rather than a hard transition once all credit unions have been assessed under RBSF.

FSRA anticipates it will require an approximate two year period until all credit unions are assessed under RBSF (during which time premiums will be based on the lesser of an assessment under RBSF and the proposed methodology or the current methodology). A significant result of RBSF is that FSRA will be able to calculate DIRF assessments with greater accuracy so premiums will be better aligned to the risk profile of each credit union and the sector in aggregate. As such, FSRA considers it would not be of benefit to the sector to extend the proposed transition period.

Libro

Stakeholder expressed concern that larger and more complex credit unions will have difficulty in maintaining an Intervention Level 1 rating. Is there a reasonable control environment that can bring a large and complex credit union back down to a Level 1 Intervention Level (if initially higher)?

The ORR of a credit union is used in determining the Intervention Level to address identified prudential or conduct issues. Larger and/or more complex credit unions would not necessarily have higher Intervention Levels. It is after determining the Intervention Level that proportionality (size and complexity) is applied to determine the level of supervisory engagement and attention to be placed on a credit union. FSRA will have a higher level of supervisory engagement with larger and/or more complex credit unions whose failure could materially impact the sector. As well, FSRA will have a higher level of supervisory engagement with credit unions that are riskier. So as a credit union's ORR improves, the level of supervisory engagement will reduce. FSRA expects and will work with a credit union to implement a remediation or action plan to rectify or address identified concerns and commit to reducing its Intervention Level rating within acceptable timeframes established in the improvement plan. FSRA’s Intervention Guide (included as Appendix C to the RBSF Guidance) communicates the stages at which an action/intervention would typically occur and provides a mapping of the typical combinations of ORRs and Intervention Levels.

Libro

Stakeholder reiterated its comment made in the RBSF consultation that recovery and resolution planning processes should influence how credit unions are examined as well as how premiums are calculated. The stakeholder said there is no mention of either plan within the consultation which continues to challenge value for effort. It asked that FSRA consider how this can be leveraged through the RBSF to better enhance DPS scoring and sector resilience.

Recovery and resolution plans are assessed within RBSF and are inputs to determining a CU's ORR. The following is an excerpt from the Capital section of the RBSF Guidance (page 7): "Overall resilience of a CU is assessed holistically through both financial and non-financial factors and considers both "business as usual" and "post-stress event" conditions. Financial resilience factors include capital and liquidity; non-financial factors are generally governance and operational-based and focus on crisis preparedness. Some key indicators of resilience performance and characteristics are the strength of a CU's in Internal Capital Adequacy Assessment Process; adequacy and implementation of Recovery Plan, Contingency Funding Plan, Business Continuity Plan and Disaster Recovery Plan during stress." In addition, credible recovery and resolution plans will lead to a better Resilience Rating which may lead to reducing the CU's ORR.

Talka

Stakeholder suggested FSRA should be providing more incentives to credit unions to increase the quality of their capital, perhaps by increasing the range of retained earnings as a percent of RWA from 5.5% to 7.5% and modifying the tables.

Introduction of the quality of capital metric recognizes that (and benefits) a credit union with a higher level of quality capital has an increased ability to absorb unexpected losses and is less likely to impact the DIRF. This metric aligns with requirements set out in the Capital Adequacy Rule. In addition, under the RBSF, when Capital (including Earnings) is assessed, greater amounts of higher quality capital may lead to an improved Capital Rating and may lead to a lower (better) ORR. The proposed DPS methodology intends to maintain the aggregate amount of premiums assessed to the sector in 2021, maintain the current premium base rate, and align with FSRA's current plan to achieve a DIRF target of 100 bps of insured deposits by 2025/2026. To achieve these objectives within the proposed DPS premium structure, FSRA considers retained earnings greater than 5.5% of RWA is the appropriate level at which to assess the lowest premium rate.

CCUA

Stakeholder said DPS inherently has more likelihood of dispute than a linear method. Therefore, it is important for FSRA to establish an appeals process that is fair and open and that allows credit unions to challenge their risk classification and assessment. The stakeholder asked FSRA to provide a formal documentation of a process for how a credit union may have its RBSF score adjusted outside of a new examination. In addition, the stakeholder asked about an appeal process.

FSRA will articulate these processes in Dispute Resolution Guidance that will be subject to public consultation during fiscal 2023-2024.