Meeting summary - November 17, 2023

Meeting summary

Credit Union Technical Advisory Committee (TAC) for Regulatory and Supervisory Initiatives

Date: November 17, 2023 
Time: 1:00 – 2:00 pm
Location: Virtual
Attendees: See Appendix A

The meeting of the TAC for Credit Union Regulatory and Supervisory Initiatives focused on the proposed Capital Adequacy Requirements (CAR) Rule that FSRA is reviewing.

Proposed Capital Adequacy Requirements Rule

Overview 

FSRA provided an overview of its legislative authorities, objects, and commitments, and presented its rationale for initiating a review of the CAR Rule. FSRA noted that as per the 2023-26 Annual Business Plan, the review aims to update areas that require better risk alignment as part of FSRA’s commitment to enhance the regulatory framework governing credit unions (CU). 

FSRA provided context for the review and noted that since the implementation of the CAR Rule, there have been macro changes that may have implications for the sector. FSRA further noted that other jurisdictions have also updated or are reviewing their capital adequacy requirements. FSRA emphasized that the review aims to reflect the sector's development and align with international standards. FSRA further noted that 18 different areas have been considered for additional clarifications based on the sector’s feedback, and other areas have been identified by TAC members for consideration. 

FSRA then provided a brief overview of its preliminary thinking with respect to the scope of the review and noted that it has identified five potential areas. FSRA stressed that these areas reflect its preliminary thinking and invited TAC members’ input on these and any other areas that should be considered as part of the review. FSRA encouraged the committee members to provide written submissions on technical areas that may require further clarification.

FSRA outlined the areas being considered for the scope of the review based on preliminary analysis.

1. Enhancing the clarity of existing provisions

FSRA stated that the CAR Rule review intends to enhance the clarity of the existing provisions, including in areas identified as unclear by the sector since the rule became effective. 

2. Better alignment of risk weights 

FSRA stated its desire to leverage the Enhanced Data Collection (EDC) initiative to inform risk weights to better align capital with risk. FSRA further explained that the risk weights for mortgages will still be based on the three traditional risk metrics (i) Total Debt Service Ratio, (ii) Amortization, and (iii) Loan-to-Value Ratio) but could also include more granular metrics to better reflect the actual risk.

3. Changes in other jurisdictions

FSRA noted that as part of the review, it intends to look at changes to the capital adequacy requirements in other jurisdictions. Any such changes would be considered from an Ontario perspective.

4. New and emerging risks

FSRA explained that it could potentially incorporate new emerging risks, such as climate risk and crypto assets, in the new CAR Rule by setting out a capital treatment for such exposures and assigning appropriate risk weights.

5. Guidance review

FSRA stated that the proposed CAR review would include reviewing the other associated guidance, such as Structural (Interest) Rate Risk guidance and Internal Capital Adequacy Assessment Process (ICAAP) guidance. FSRA indicated it would consider consolidating other relevant pieces of guidance into the new CAR Rule. 

Summary of questions related to the CAR Rule review

1. A member enquired about the reason for the 1250 percent risk weight in the CAR Rule. The member said they did not think the credit union sector had exposures that would require a 1250 percent risk weight. 

• FSRA explained that two types of investments have a 1250 percent risk weight in the rule: significant investments in commercial entities and unrated retained securitization exposures. FSRA further stated that the new rule will address other items/products that cannot be adequately classified in the current table. FSRA encouraged the member to send in a written submission with respect to items/products that need to be classified correctly in the current CAR Rule.

2. One member sought clarification with respect to community as well as financial technology investments. The member asked about the distinction between investments in financial technology and commercial entities.

• FSRA explained that investments in financial technology and local community up to an aggregate maximum of 1 percent of the credit union’s total capital would attract 100 percent risk weight, and any investments above 1 percent would attract an appropriate risk weight as set out in the Rule. FSRA further explained that the intention is not to discourage the sector from investing in the local community or innovation. FSRA welcomed ideas to help clarify this aspect of the rule.

3. A member inquired about the need to review the ICAAP guidance for more clarity. The member asked about investment shares in Central 1, which are risk-weighted at 100 percent despite its strong credit rating and a positive outlook. The member also asked for further clarification with respect to real estate investment and other investments, including consolidated investment in other companies that are not consolidated in the financial statements of a credit union. The member sought further clarification on treatment of equity investment in funds.

• FSRA requested the member to articulate their questions in writing and send them in so that his concerns are appropriately captured. 

4. A member asked if, going forward, the TAC will be used to solicit stakeholders' feedback or focused working groups will be created to ensure that participants have relevant expertise.

• FSRA noted that it is open to leveraging the TAC, with the flexibility to invite organizational representatives with the relevant expertise, or establishing sub-working groups focused on specific areas to solicit stakeholders’ feedback. FSRA further noted that it will take into consideration TAC’s feedback on how best to proceed with the review. 

5. Another member asked if there are plans to use risk weights to incentivize credit unions’ transition to a low carbon economy, for example by lowering regulatory capital requirements for certain climate-friendly investments, known as "green-supporting factors."

• FSRA said it would welcome ideas/suggestions from the sector with respect to what FSRA should be doing regarding climate change or green investment.

6. One member sought clarification on the use of the total debt service ratio (TDSR) in risk-weighted assets and noted that it is not a perfect calculation. The member agreed that TDSR is a standard calculation, but because of the timing difference in its calculation, it may not perfectly reflect the borrower's affordability, unlike the credit score, which is done from time to time. The member also sought to know whether there is a better metric to measure affordability besides TDSR. 

7. FSRA explained that there are a lot of elements in the specifications for loan data on the FSRA website. These elements could affect TDSR calculation, and those elements must be updated to reflect material change. Regarding the timing difference, FSRA explained that its Residential Mortgage Guidance states that all data that goes into the calculation of TDSR needs to be refreshed for every material change. 

8. A member said proposals released in other jurisdictions favors conservative mortgage borrower profiles and that pressures facing Ontario credit unions may be different, and ought to be considered as part of the review.

• FSRA noted that data calibration will be carried out in Ontario and that FSRA will not import and adopt the calibration from other jurisdictions. 

9. One member sought clarification regarding whether agriculture loans are a separate class from a commercial risk weighting standpoint and if FSRA will provide a standardized template for the sector to calculate risk. 

• FSRA stated that consideration will be given to both classifying agriculture separately and a standardized template. 

10. Another member asked about the type of data CUs are expected to collect regarding EDC and whether data collection will be required after or before the release of the rule to determine the appropriateness of capital. The member also asked if a standardized data set was to be used in the CAR Rule project.

• FSRA said that a timely and gradual collection of data before the rule's release would be appropriate, and the EDC initiative and CAR Rule should work at the same speed. There will be alignment between the data set in the EDC and CAR Rule. 

11. A member asked what FSRA is doing about cryptocurrency and noted that it is something to be mindful of.

• FSRA indicated that to its knowledge, the sector’s exposure to cryptocurrency is minimal. However, FSRA is being proactive and forward-looking and for views from the TAC as to whether the CAR Rule should specify an appropriate treatment for crypto exposures.

Next steps

FSRA to review the feedback provided at the meeting and received in writing and will propose an engagement strategy for the remainder of the review.

Attendance record

Invited/Attended	Company name	Attendance status (A)ttended; (R)egrets; (S)ubstitute;
Bradley Hodgins	FSRA	A
Daniel Padro	FSRA	A
Amos Ojebiyi	FSRA	A
Amber McNair	FSRA	A
Elliot McPhail	FSRA	A
Daniel Oprescu	FSRA	A
Jason Harris	FSRA	A
Ayesha Zubair	FSRA	A
Shad Rafi	FSRA	A
Dharamveer Singh Badech	FSRA	A
John Caldwell	FSRA	A
Perrin, Chris	MOF	A
Janet Johnson	Libro Credit Union	A
David Sorley	Mainstreet Credit Union	A
Rabih El Dana	DUCA Financial Credit Union	A
Tammy Buchanan	Northern Credit Union	A
Sandy Ferguson	Mainstreet Credit Union	A
Olivier Lareau	Caisse Populaire Desjardins	A
Matthew Hitchens	Copper Finance	A
Brent Furtney	CCUA	A
Riz Ahmad	DUCA Financial Credit Union	A
Emily Vanderkruk	Northern Birch Credit Union	A
Maryse Gauvin	Caisse Alliance	A
Mahmood Nawab	Alterna Credit Union	A
Jonathan Goodman	DUCA Financial Credit Union	A
Mike Howard	Picuz Solutions	A