Proposed updates to FSRA’s Capital Adequacy Requirements Rule

Technical Advisory Committee for Regulatory and Supervisory Initiatives

April 22, 2025

External meeting attendees:

Kevin Koik
Genevieve Beaupre
Bruce Klassen
Michael Beland
Mahmood Nawab
Awais Mojai
Anthony D’Errico
Rudy Chau
Matthew Hitchens
Brent Furtney
Mike Howard
Janet Johnson
Maryse Gauvin
Sandy Ferguson
Guillauma Muller

FSRA meeting attendees:

Ayesha Zubair
Victoria Lesau
Chris Calderelli
Roobina Medhizadah
Bradley Hodgins
Dan Oprescu
Jessica Rose
Alexander Hopewell
Daniel Padro
James Aderinwale
Shad Rafi

Meeting purpose and introduction

FSRA set out the purpose of the meeting:

FSRA acknowledged the change in Ontario’s economic climate and noted their commitment to continue to collaborate with the sector to understand and navigate the risks posed by tariffs.

FSRA reminded the TAC of the engagement on CAR Rule review in December 2024 and acknowledged that their feedback and suggestions were taken into consideration when developing the preliminary proposals.

Understanding and managing the risks posed by tariffs

FSRA confirmed they are carefully monitoring the risks posed by tariffs and are currently completing tariffs-related stress testing of plausible scenarios using the existing data. FSRA also noted there will be a data call to obtain instrument level data, and this will be used to support analysis of the tariffs’ impacts. This data will be leveraged to undertake the Quantitative Impact Study (QIS) for the CAR Rule.

FSRA mentioned that, due to the current tariff situation, the timing of the data call is being carefully considered and FSRA will work with CUs in this regard.

Stakeholder feedback on FSRA’s overall approach

FSRA thanked the stakeholders for their valuable feedback and provided an overview of the stakeholders’ feedback on its overall approach to the review and how it intends to address this feedback.

Preliminary proposals to update the CAR Rule

FSRA provided an overview of the preliminary proposals related to enhancing the risk sensitivity of capital allocation for credit, operational and market risks.

Credit risk – Residential mortgages

FSRA presented its preliminary proposal for residential mortgage lending along with the supporting considerations.

A stakeholder inquired whether the risk indicators presented are to be considered at the time of the origination of a contract or throughout the duration of the loan. FSRA indicated that this matter is under discussion and the expectation is that CUs should always be aware of portfolio changes such that these changes are reflected in CUs’ capital allocation. FSRA invited the sector’s suggestions on this point to ensure intended outcomes are realized without putting undue burden on the sector.

Credit risk – Commercial lending

FSRA presented its preliminary proposal for commercial lending along with the supporting considerations.

Stakeholders inquired if FSRA will provide definitions to help categorize the various types of loans. FSRA noted that it intends to provide guidance to ensure that loans are categorized correctly, and that this information would be included as part of the Rule or the accompanying Guidance. Stakeholders stressed the need for clarity between the interplay of various risk indicators when determining the risk weights.

Another stakeholder noted that FSRA’s proposed Loan-to-Value (LTV) threshold is slightly higher compared to what is in place federally. FSRA responded that the preliminary QIS indicated 70% was more appropriate for the sector and noted that further suggestions on this are welcomed.

Operational risk

FSRA presented its preliminary proposal for operational risk along with the supporting considerations.

Stakeholders inquired about risk indicators for operational risk, i.e., the type of products offered and legal structure, and requested examples to better understand FSRA’s preliminary proposal. FSRA explained that its proposal reflects the type and complexity of the products, such as residential and commercial loans. FSRA added that it is important to consider all aspects of a CU’s business, including off balance sheets activities when considering operational risk. In response to the sector’s questions on legal structure as an operational risk indicator and what would constitute a high versus low-risk rating, FSRA noted that specific elements of the proposal are still in the process of being refined and welcomed the sector’s feedback.

A different stakeholder inquired about FSRA’s inspiration or reference for its proposal on operational risk (e.g., OSFI’s Simplified Standardized Approach (SSA) or internationally). FSRA clarified that its preliminary proposal is close to SSA and has been adapted to fit the Ontario CU sector.

Interest rate risk

FSRA presented its preliminary proposal for interest rate risk along with the supporting considerations.

FSRA noted that the existing methodology uses an Earning at Risk approach, but it does not capture long dated exposure or non-linear change to interest rates. It also does not account for factors including economic value erosion, product structure, and hedging.

FSRA added that it is proposing to introduce a capital charge formula that takes into consideration interest rate sensitivity of assets (e.g., loans, mortgages) and interest rate sensitivity of liabilities (e.g., deposits).

Stakeholders talked about the benefits of the existing approach and sought clarity on FSRA’s intentions with the interest rate risk proposal.

FSRA clarified that its preliminary proposal is aimed at standardizing the capital charge calculation across the sector. In response to a question on treatment of swaps, FSRA clarified that its preliminary approach is intended to reward CUs that are using hedging effectively.

Proposals suggested by stakeholders

One stakeholder asked FSRA to issue guidance on Alternative Investments in addition to the planned guidance on Real Estate Investments. FSRA responded that, at this point in their work plan, real estate investments were considered an important area to provide guidance on based on current sector exposures.

Additional questions

FSRA concluded the presentation and asked TAC members if they had any additional questions.

Relative to credit prospects for credit risk – residential mortgages, one stakeholder expressed interest in the use of “and/or” for two risk indicators i.e., credit score and total debt service ratio (TDSR) and inquired about the underlying rationale. FSRA explained that TDSR is the primary driver, and if that information is not available, the credit score can be used as an alternate. FSRA also clarified that the intent of the table is to capture the most up to date measure of the borrower’s ability to pay.

Another stakeholder noted that FSRA’s approach seems to follow what is in place for the system in British Columbia (B.C.) and asked if a similar weighting score should be expected, given that most metrics will be similar. FSRA also added that while their approach is similar to BCFSA, the assessment is intended to be unique to Ontario.

Stakeholders inquired about the timeline for the QIS, and noted it was the most important piece that was missing. FSRA responded that they are actively working on the risk weights and QIS, and will share it with TAC when it is finalized this fall. The stakeholder then asked about when the proposed risk weights can be expected to be shared. FSRA explained that due to the current tariff situation, timelines were being recalibrated and will be provided to stakeholders later in the year.

Conclusion

FSRA concluded the meeting by letting stakeholders know they will initiate a call for new TAC members soon, a standardized process for FSRA’s TAC committees.