The Financial Services Regulatory Authority of Ontario (FSRA) is clarifying how credit unions should prepare their 2021 Internal Capital Adequacy Assessment (ICAAP) reports.
Per section 17(2) of the Capital Adequacy Requirements Rule 2021-002 that came into effect in March 2022, credit unions are required to establish an ICAAP process.
Per the January 2018 Guidance Note: Internal Capital Adequacy Assessment Process (ICAAP) – Credit Unions with Total Assets Greater than $500 Million, credit unions are required to submit an annual summary of their ICAAP to FSRA.
As outlined in the Guidance Note, the ICAAP Report (See: Appendix 1 – ICAAP Submission Template and Summary Key Metrics Report) must be submitted no later than the end of the third fiscal quarter.
Impact of Capital Adequacy Requirements Rule 2021-002 on ICAAP reports
The Capital Adequacy Requirements Rule 2021-002 requires credit unions to maintain and monitor the following six capital ratios:
- Tier 1 capital ratio
- Retained earnings to Risk weighted asset ratio
- Risk weighted capital ratio (Total capital ratio)
- Capital conservation buffer ratio
- Total supervisory capital ratio
- Leverage ratio
The Rule introduced changes to the risk weights of various asset categories and credit unions are required to observe these changes in the ICAAP submissions post-March 1, 2022.
Section 17(3) of the Capital Adequacy Requirements Rule 2021-002 outlines the items to be included in the ICAAP Report. These requirements should be read in conjunction with FSRA’s previous guidance on ICAAP.
Credit unions are required to include capital projections for a minimum of three years in their ICAAP submissions. Capital projections should include the six capital ratios (outlined in the new Capital Rule (See numbered list above).
To support the preparation of the capital projections, FSRA is providing a recommended format for the three-year financial projections.
Financial plans and capital calculations are based on fiscal year end data. To facilitate transitioning to the requirements of the new Rule without restating fiscal year end figures preceding the coming into force of the new Capital Rule, the template includes an additional column (marked in grey below) where credit unions are expected to provide their capital metrics calculated in accordance with the new Capital Rule.
Notice – Data requirements
Credit unions with fiscal year ends in December or January should provide data as of the end of the first fiscal quarter following March 1, 2022 (the introduction of the new Rule), i.e., the quarter ending March 31, 2022 or April 30, 2022 respectively.
Credit unions with fiscal year ends following March 1, 2022 (the introduction of the new Rule) do not have to include this additional column as their fiscal year end data will already be calculated in accordance with the new capital requirements.
|FYE 2021/22||First fiscal quarter end post-March 1, 2022||FYE 2022/23||FYE 2023/24||FYE 2024/25|
|Cash and investments|
|Membership share capital|
|Total liabilities and equity|
|Tier 1 capital|
|Tier 2 capital|
|Total regulatory capital|
|Risk weighted asset (RWA)|
|Tier 1 capital ratio|
|Retained earnings to risk weighted asset ratio|
|Risk weighted capital ratio (Total capital ratio)|
|Board limit for total capital ratio|
|Capital conservation buffer ratio|
|Total supervisory capital ratio|
|Surplus capital over minimum total supervisory capital ratio of 10.5%|
* Credit unions with December 2021 or January 2022 fiscal year end are required to calculate Risk weighted capital ratio and Leverage ratio consistent with the previous capital requirements.
** Only required for credit unions with fiscal year end in December 2021 and January 2022. This column is not required for credit unions with fiscal year end following March 1, 2022 and for all the future ICAAP submissions (2023 and onwards).
ICAAP for credit unions with consolidating subsidiaries
Effective March 1, 2022, credit unions with consolidating subsidiaries are required to assess capital adequacy on a consolidated basis.
Credit unions with consolidating subsidiaries are required to provide their ICAAP and the three-year capital projection on a consolidated basis. However, per FSRA these credit unions are required to include an additional chapter in their ICAAP Report clarifying the proportions of capital allocated for risks with the credit union and subsidiaries. Credit unions should also explain the rationale for capital allocations for specific risks for each subsidiary.