Proposed updates to FSRA’s Capital Adequacy Requirements Rule

Technical Advisory Committee for Regulatory and Supervisory Initiatives

December 5, 2024

External meeting attendees:

Aaron Curnoe
Brent Furney
David Sorley
Maryse Gauvin
Mahmood Nawab
Mike Howard
Jonathan Goodman
Sunny Sodhi
Sandy Fergusan
Matthew Hitchens
Tony D-Errico
Jessica Rose
Jeff Runnalls
James Bush

FSRA meeting attendees:

Ayesha Zubair
Victoria Lesau
Chris Calderelli
Roobina Medhizadah
Calvin Johansson
Catherina Antoun
Bradley Hodgins
Jason Harris
Dan Oprescu
Daniel Padro
David Maxwell
Antoinette Leung

Meeting purpose and introduction

FSRA set out the purpose of the meeting:

FSRA noted that the existing CAR Rule, effective as of March 1, 2022, is generally aligned with the Basel III Framework with some exceptions to acknowledge the unique nature of Ontario credit unions, and that it was developed through extensive engagement with the credit union sector over 2020-2021. FSRA reminded TAC of their engagement in November 2023, to seek TAC’s input on FSRA’ preliminary thinking in regard to the scope of the ongoing CAR Rule Review.

Proposed updates to the CAR Rule

FSRA provided an overview of the proposed updates to the CAR Rule and began by focusing on enhancing the granularity and sensitivity of credit risk, market risk and operational risk.

Enhancing the granularity and sensitivity of credit risk, market risk and operational risk

In relation to credit risk related proposals, TAC members raised questions about the details of the proposed risk weights incorporating the additional risk factors. FSRA responded that the specific risk weights have not yet been determined and that further details will be provided once FSRA’s internal quantitative analysis is completed. FSRA added that the intent of this meeting was to seek feedback on general direction of proposals, such as whether delinquency status and credit score should be incorporated as additional risk factors.

Another stakeholder expressed support for the proposed changes and questioned whether the risk weighting would be dynamic or a point-in-time assessment, and how it would be practically implemented. They also inquired about comparisons with other jurisdictions in Canada. FSRA responded that the most comparable regime is British Columbia but emphasized that the Ontario regime is specifically tailored for Ontario credit unions. FSRA also noted that OSFI and Basel have also enhanced the granularity of their treatment of credit risk and stressed that the weightings would be customized to the Ontario experience rather than from other jurisdictions.

One stakeholder inquired about the treatment of uninsured residential mortgages, specifically whether home equity line of credit (HELOC) and term mortgages on the same property would be combined to determine the loan-to-value (LTV) ratio and highlighted that combining these could result in an aggregate Loan-to-Value (LTV) exceeding 80%. FSRA clarified mortgages and HELOCs are distinct products with their own risk profiles, and therefore would be considered separately for capital purposes.

A stakeholder raised a concern about credit unions extending amortization periods to support members in financial difficulty, questioning whether this would negatively impact the credit union’s capital position. FSRA responded that when a credit union decides to help a member by extending amortization, they must verify the member’s income and demonstrate that the restructuring is beneficial, such as by reducing payments.

Stakeholders inquired whether agriculture would fall under the commercial loan category. FSRA confirmed that the commercial lending related proposals are specific to commercial real estate and do not include agriculture loans. There was a brief discussion about whether Loan-to-Cost (LTC) should apply to all commercial lending or just real estate, including community groups and non-profits. FSRA explained that the riskiness of these projects would be assessed like any other enterprise, and if there is government support providing additional security, it would be considered.

One stakeholder suggested that agriculture should have a distinct category to ensure the various types of lending are appropriately classified. FSRA emphasized that agriculture loans are treated distinctly from commercial loans.

A stakeholder raised concerns about credit unions taking certain non-traditional risks and the potential impact on the sector, suggesting higher risk weights for alternative investments and real estate investments. They emphasized the importance of clarity from FSRA on these issues. FSRA responded that the CAR Rule contemplates unusual transactions and has provisions to account for such transactions.

Strengthening the composition of capital

One stakeholder expressed concern about the magnitude of the proposed increase in the retained earnings ratio, given their existing internal limits. The stakeholder suggested a phase-in for this proposal. FSRA noted that this concern would be taken into consideration when looking at transition periods and that they are working with credit unions currently offside the retained earnings ratio, helping them to reach compliance.

In relation to the proposal on capital management, FSRA noted that the revised approach emphasizes that the Internal Capital Adequacy Assessment Process (ICAAP) provides a framework for robust capital management. FSRA elaborated on its proposal that all credit unions would need to demonstrate prudent capital management with a consideration for proportionality in terms of size, nature, complexity, and risk profile.

New and emerging risks

FSRA also added that they will work with credit unions to integrate climate-related physical risks into their risk management framework on a best-efforts basis.

Credit unions rules and Guidance 5-year work plan

FSRA provided an overview of their sector work plan, noting the goal to finalize the CAR rule by 2026, conditional upon a public consultation, consideration of stakeholder feedback, and ultimately approval by the Minister of Finance.

A stakeholder expressed their appreciation of FSRA’s consideration for pace of change in developing Rules and Guidance, and specifically noted the additional details provided in the workplan were helpful.