On December 12, the Financial Services Regulatory Authority (FSRA) held an online credit union Town Hall. The event included an overview of what continuous supervision will look like following the initial round of Risk Based Supervisory Framework (RBSF) assessments. We also shared themes and trends from the commercial lending thematic review.
Thank you to everyone who attended.
Your takeaways included:
- an overview of what credit unions can expect from continuous supervision now that the initial round of RBSF assessments has been completed
- themes and trends from the commercial lending thematic review
- an opportunity to ask questions directly to FSRA staff
FSRA continues to work on behalf of all stakeholders, including consumers, to ensure financial safety, fairness, and choice for everyone.
Credit Union Town Hall Webinar Deck
Date: December 12, 2024
Q&A (all questions answered in the webinar)
You can view this video with closed captioning by selecting the “CC” button in the video menu. Note: the closed captioning text is automatically generated and has not been reviewed for accuracy.
Hello everyone and welcome to today's webinar.
We started the session just a little bit early today. Our apologies. We will start the session at 10 a.m.
Eastern. Please let us know if you're having any issues hearing us.
you Thank you.
You you you Thank you.
you Hello everyone and welcome to today's webinar, FISRA's Credit Union Town Hall.
Before we get started, I'd like to go over a few items so you know how to participate in today's event.
You have the opportunity to submit text questions to today's presenters by typing your questions into the questions pane of the control panel.
You may send in your questions at any time during the presentation.
We will collect them and address them during the Q &A sessions at the end of each of today's presentations.
If you're having issues with your audio, you can switch from computer audio to phone call by selecting the Settings icon on the GoToWebinar Control Panel.
And now I'd like to introduce Bradley Hodgson.
Good morning, everyone.
Thank you for attending today's Credit Union Town Hall.
My name is Brad Hodgins.
I'm the Director of Risk Governance and Financial Stability, and I'm joined today by Steve Cochlearis, the Director of Approvals and Supervisory Practices, and we'll be your host today.
I hope you find today's Town Hall informative, so let's get started.
We'll be taking questions after each of the two presentations, so please enter your questions for the commercial lending thematic review first during the next 15 or 20 minutes and then we'll go on to the presentations from there.
Please note that a link to the recording will be provided to all participants in the coming days.
So, first we have the commercial lending thematic review, then the questions, and then we'll continue with the continuous supervision followed by a Q &A session as I just articulated.
Next slide, please.
So, it's important to acknowledge that the land that we are on is the traditional territory of many nations, including the Mississaugas of the Credit, the Nishinaabek, the Chippewa, the Haudenosaunee, and the Wendat people, and is now home to many diverse First Nations, the Inuit and Métis peoples.
We acknowledge that Toronto is covered by Treaty 13 with the Mississaugas of the Credit and the Williams Treaties signed with multiple Mississaugas and Chippewa bands.
Next slide, please.
So today's presentations will be led by Dan Oprescu, who's the Head of Credit Union Prudential Supervision, and David Maxwell, the Head of Regulation and Strategic Initiatives.
I would now like to hand the presentation over to David Maxwell, who will take us through the Commercial Lending Thematic Review presentation.
David?
Thanks.
Thanks, Brad.
So yeah, I'm going to take the next 10 or 15 minutes to talk through some of the sort of observations from our Commercial Lending Thematic Review and just sort of a couple of caveats at the outset.
First of all, as Brad said, the recording for this session will be made available, these materials will be made available to attendees, but also we are in the process of producing a report on this thematic review.
Once that report has been approved by our board, you will see a version of it that will be sent out to you in advance of discussions with your relationship manager on the observations specific to your credit union.
So please keep that in mind as we go through today.
I'm not going to focus too much on the specific numbers, more so on the process, but ultimately you will have an opportunity to have a fulsome discussion with the relationship management team on the circumstances of your particular credit union, as well as our observations on the sector more broadly.
So with that in mind, I will get started. Obviously, thematic reviews are an important part of the work that we do.
We use it to either focus in on areas where we feel like there are particular or emerging risks, as well as areas where we feel like we could benefit from a better understanding of the controls and governance that are in place.
And in that regard I think commercial lending fit both of those criteria.
There's a list here of some of the challenges in the sector.
If you're not familiar with these, it's possible that you're in the wrong webinar. I think these are relatively well understood at this point.
But certainly as we monitor conditions in the environment and as we enter into discussions with individual credit These are some of the things that are on our mind or are informing some of the questions that we looked at around commercial lending.
The other thing that I'll note is that when we talk about commercial lending here, we are really talking about commercial real estate, which makes up a large percentage of the sector's exposure.
So from both an income producing and non-income producing perspective, our focus was on commercial real estate rather than commercial lending more broadly.
We can move to the next slide please.
So this talks about the scope of our work.
We focused on 44 out of the 55 credit unions in the sector, those that represent the vast majority of commercial real estate lending.
You'll see an impressive number of loans reviewed.
And this is data that was collected in April and May of last year and aligns with our risk and regulatory data specification.
So thank you to those of you who were involved in providing us with that data.
It's fundamental to the way that we do our work.
There was also a qualitative piece to this, a questionnaire that accompanied the data request.
This was focusing on risk management practices and governance more specifically in the non-income producing segment, where again, we had slightly less visibility into the types of controls and oversight that are in place, and where we're of the view that risks are higher than they are in the income producing segment.
Next slide, please.
So this is obviously a key area for Ontario's CUs, and I think a growing area as CUs look to diversify their revenue sources in light of interest rate conditions more recently.
As I mentioned earlier, commercial real estate is the largest component of commercial lending.
roughly 70% of the sector's total loans.
And that's why we chose to focus on that particular area in this case.
We are, as I also mentioned, looking at elevated credit risk in commercial lending, particularly in real estate owing to the conditions that were listed on an earlier slide.
So this is sort of some of the context in which we entered into this exercise earlier this year.
Next slide, please.
There are obviously opportunities in this segment of lending, higher margins than there might be in other segments, but there are specific skill sets and experience that are required in order to effectively manage these types of exposures.
CEUs need to demonstrate that they have these specific skill sets and experience in addition to the governance, the controls, the systems, the processes, the frameworks that we typically look at.
And so part of this process and part of the ongoing conversations will be around the extent to which credit unions can demonstrate that they have these skillsets, that they have the experience in order to provide comfort both to credit union boards and ultimately to us that these margins are offset by appropriate levels of oversight.
Data quality continues to be a challenge and we understand that we're still sort of in the, well, not fully implemented as far as enhanced data collection.
But as you look at sort of just three examples of some of the fields where we had challenges getting data, I hope that you'll agree with me that these are fairly foundational to effective risk management of any lending and lending in particular. And so this is something that we will continue to look to.
It's something that we will continue to enhance through the implementation of enhanced data collection.
And I would also note that in the absence of good data, we do make conservative assumptions when it comes to these metrics. That then contributes to our views of the associated risks.
It elevates our expectations for the associated controls and may ultimately have an impact on the risk rating and intervention level that gets assigned to your credit union.
So these challenges around data I think they're in both of our interests to continue to try and resolve them.
I will note that we are seeing real progress in the sector in that regard so thank you for your efforts in that regard and we will continue to work with you. Next slide please.
So these are some of again the macro factors that we look at as we look to understand sort of the increase in delinquency rate and obviously interest rates have played a significant role in the last little while.
You'll see these two charts at the bottom.
I think the orange boxes are not necessarily meant to highlight the same period or even necessarily the period for which we collected data because Ultimately, the data was point-in-time at, again, sort of the April-May timeline, but what we're really seeing here is the increases in the prime rate from 2022 and 2024, and then the expected impact on delinquency, which was somewhat delayed, again, as we would expect.
But ultimately, these are the conditions that we were observing as we looked to take on this exercise and ultimately feed this information back to the sector in order to fulfill our statutory objects, which include confidence in the sector, stability in the sector, and ultimately the resilience of credit unions.
Go to the next.
So again, we split this into income producing and non-income producing.
Non-income producing being primarily sort of construction and land development lending, which we see to be higher risk.
roughly a two-thirds, one-third split between the two, as you'll see here.
We did look in particular at office lending.
I think there's a reasonable understanding, hopefully in the audience here, that that's relatively high exposure.
Ultimately, as you'll see here, the concentrations in the sector in that particular space It didn't generate any specific concerns, although I will note that there's elevated risk everywhere here.
And as we look at sort of the large proportion, for example, that are residential, that's primarily represented by condos, which are no cakewalk in and of themselves.
So no major concentration in the highest risk segments, but all of these categories we continue to monitor closely given the associated risks.
Next slide, please.
So as I said, office-related commercial real estate shows the highest delinquency rate.
And so we look at sort of breaking it down in the way that you see here.
I will note that, you know, obviously residential highest exposure, no surprise there.
In terms of equity investments, also the highest exposure.
You'll see in the footnote at the bottom, when we talk about equity exposure, we don't include mutual funds, which are estimated at about $200 million for the sector in total.
So the equity value you see here represents joint ventures in investment.
And so that's something that we monitor as well, given the potential lack of control and the commensurate expectations for enhanced oversight.
Next slide, please.
So, I mentioned that there was a qualitative element to this as well.
FISRA recently issued revised commercial lending guidance.
And so, we did look carefully at the commercial lending framework that was in place for each of the credit unions.
Evidence suggests that the good news is these frameworks are reviewed and approved by the board, at least annually.
That is good practice and something that we would like to see continue.
These frameworks obviously establish the parameters for commercial lending activities.
And so it's important that the board understand not just what the exposures are, but what the strategy is so that there's some rationale for the enhanced risks associated with this type of lending.
We move to the next, please.
So we have a list here of sort of areas of deficiencies.
So, these are thematic areas and not necessarily present at every credit union, but they were prominent enough that we thought that they were worth calling out here.
I think, you know, to the extent that you see some of these as just a documentation problem, we like a documentation in two ways.
The first being that it's a way to ensure that the practices that are in place at your in are applied in a consistent manner over time which is hugely important for your ability to manage those risks.
The documentation is also a way for you to evidence to us that appropriate practices exist and so we do obviously look at effectiveness as well in the practices themselves but we do put some weight on the extent to which they're documented and you'll see that reflected here.
If there's one that I would like to emphasize here it's number four that you see on the list which is that a vast majority of CUs did not have a threshold for loans with exceptions and non-conforming loans as a percentage of total commercial loans.
This is an area that we will be monitoring very closely going forward.
There's an argument to be made that, you know, why have processes and limits if there's no limit on the exceptions or loans that are non-conforming.
And I think this will be going forward a very important thing for you to monitor as well for you to flag to your board, because it's very much indicative of the risks that exist in your portfolios. Next please, Tracy.
So again, beyond just the documentation, we did look at the reporting itself.
So the extent to which board and senior management appear to be getting sufficient information. Obviously, there are still some gaps.
We talk about the of data, we've talked about flagging exceptions and non-conforming loans, but the good news is that information reported to the board and senior management was largely deemed to be sufficient based on the information that we observed in the course of this thematic review.
Next please.
So these again areas of where thematically we noted it says deficiencies here, but I'm going to optimistically say areas for enhancement for credit unions.
One of those, again, is, and we mentioned this earlier, but ties to strategy, right?
Articulating for your board why it is that the elevated risks associated with some of these activities are worthwhile and how they factor into a broader strategy that factors in, you know, among other things, the long-term resilience of your credit union and so we flagged that you know in particular for the for the non-income segment and land development or land servicing loans we noticed credit unions that were offering those loans without ever really having articulated why they feel first of all that it fits with the strategy and secondly why they feel that the risks will have appropriate oversight and controls.
We also noted that a large proportion of credit unions don't have processes for the validation of ECL.
I hope that I don't have to explain why we view that as critical to lending and pricing and capital allocation decisions.
We would hope that you also view that as critical, and so we'll be looking to enhancements to that going forward.
We also note that from an oversight perspective and an independent validation perspective, audit scopes in general were not sufficient to cover the risks and controls for commercial loans.
So those are enhancements that we will be looking to see going forward.
So again, just to wrap up here before we get into questions, this is a conversation that you're going to have with the supervision team in the coming months.
Again, we need to put this report in front of our board first, but then we will be distributing it to the credit unions.
So you will see some version of this on paper in addition to the materials that have been prepared for this today.
In some cases, the observations that were made as part of this review will ultimately impact our determination of your overall risk rating and your intervention level.
So for some of you, that conversation with your relationship manager, with the supervision team, will be followed by an interim supervisory letter that communicates the changes to the overall risk rating and the intervention level.
Dan, in the second portion of this, is gonna speak to sort of our dynamic process for assessing overall risk and the appropriate level of intervention.
But ultimately, the key message there is that when we get new information, we make changes to those in a dynamic way, whether it's positive or negative, to make sure that we are appropriately able to allocate our scarce resources in a risk-based fashion.
So with that, I am going to ask Dr.
Oprescu to join me on camera to see if we have received any questions on what I've just said?
Okay, thanks for that, David.
We will pause here to answer questions.
I don't have any at the moment.
That usually indicates, as usual, you present it very clearly.
But as of yet, we have no questions.
So I'll give it another minute or so.
to see if anything pops up. But otherwise, we may have to move over to Dan, but...
We have some flexibility here as well.
And I think, you know, if necessary, we can certainly deal with questions on both of today's topics at the question period in the end, to the extent that there are no burning questions at the moment.
And this is me filibustering, in case you are wondering. Oh, and it looks like we may have some questions.
So we do actually have a question, David, and the question is, is FISR considering any changes to the recent commercial guidance or not?
That's a very good question, given that we have repeatedly communicated that we are evidence-based in the development and revision of our guidance.
Dan, I don't know if you have anything to specific views on this subject? Yeah, thanks.
Thanks David and thanks for the question.
We haven't made up our minds yet but unless there is something major that we haven't found yet, something emerging from the analysis, we're not going to tinker with the guidance.
So this decision hasn't fully been made yet, but even the decision to do nothing is still evidence-based.
So we'll have to complete the analysis and then decide if there are changes.
Early views, not coming.
Yeah, and I would add to that, that sort of this is not a decision that we make in isolation.
and ultimately you know as we socialize this report with our board we'll likely get the same question from them and have that discussion with them.
So excellent question we will certainly keep the sector up to date on our thinking in this regard but at present it doesn't seem as if this is going to drive material changes.
Okay and we do have another question and the question is do we have any information on the geographic concentration of these commercial real estate exposures?
Yeah, insofar as the location of the collateral has been provided, we do have that information. Therefore, we should be able to have some idea of geographic concentrations.
Again, back to data quality, our conclusions will only be as good as data provided was.
So we will qualify our results when they will be shared with the participants in the review that in this particular analysis, data had been only 50% provided or something of that nature.
So there will be a good level of understanding of how accurate our conclusions would be because of data quality.
Okay.
Thanks for that, Dan.
And we do have another question, David, maybe this one might be sort of best answered by you.
If we are doing non-income loans, you mentioned we should have an approved strategic rationale.
should we have some kind of policy that states what kind of business decisions should have standalone strategic rationale?
Yeah, it's a fair question and certainly there are some credit unions that have a strategic planning policy, although it's not something that I think we consider to be completely necessary.
I think that ultimately, you know, it forms part of a conversation with the board.
And not just a conversation around strategy, but a conversation around the effectiveness of oversight functions, the resourcing of oversight functions and the type of activity that I think rises to the level of materiality that the board should understand it given some of the differences in skill sets that are required.
But I'm not sure that assigning a formal threshold to that is really sort of a healthy way to go about it because you may end up excluding things and I'm rambling here so I'll turn over to Dan in a second but ultimately you know this process does need to be somewhat fluid and as a management team you need to make some determinations about what it is that the board should understand when it comes to this and the director should be given enough information in order to ask follow-up questions and challenge a bit on skill sets, on oversight, on systems, on processes so that they can get a comfort level.
I don't know if you have anything to add, Dan?
No, I think you're covered it well, David.
Okay, and we do have another question, and that is that we mentioned there could be changes to risk ratings.
Would updates to these ratings be effective prior to the 2025 premium calculations, which depend on that score or not?
Yeah, good question, Melinda.
The risk ratings are introduced in the context of the capital rule revision, and 2025 is a little bit early for that.
So in a roundabout way, I think I answered no for the 2025.
Yeah, and I think, Dan, this is to the question around, because we recently communicated that the DPS was going to be following the new methodology for the entire sector, so I think this is more around premium calculations for 2025.
I may ask Brad to confirm this, but I believe that there is a cutoff for rating changes that can impact. That's right.
Those are largely, those will almost certainly be outside or sorry before these reports are issued and the relevant discussions are had. That's right.
So if you're a credit union, so depending on what your fiscal year end is, for all credit unions that have a fiscal year end of December 31st, 2024, as David articulated and outlined in the letter that was a week and a half ago, I believe, or it was just last week, that we have now entered the phase where everybody is going to be getting their calculation for premiums based on the new formulation with the two aspects of capital, as well as the ORR and the intervention level.
So if you're a credit union that has a December 31st fiscal year end, your rating as of December 31st will be the rating that will be used.
And for every other credit union that has a different fiscal year end, whatever you're rating in, say you have a March 31st fiscal year end, whatever your rating is as of March 31st, that would be the rating.
So if you have not communicated a change in your ratings as of this point, I'm going to go out on a limb and suggest that you will not be getting a change in your rating in the next two weeks.
Therefore, the rating that you had in your ISL, your most recent ISL will be the amount that will be, or those will be the ratings used in your calculations for the 2025 calculations.
But if you have a, but if you're a credit union that has a later fiscal year end, it will be the rating based on all of the metrics that we look at as of that time.
So if you're say October or September, there's much, there's a lot of time between now and and so ratings could be changed in that interim.
Yeah, and again, the timing of the report itself, as well as any communication regarding changes in risk ratings is still to be determined.
We need to go through our own governance processes before we go out to the sector formally in this regard.
So more to come on that, but we don't have any specific timeline to communicate at this point.
Okay thanks and we do have a question about the timing of the report going to the FISRA board and when would discussions be held with individual credit unions and when would the credit unions receive reports on this?
Yeah and so as I just stated we don't have any specific timelines at this point.
We will be very transparent with the sector as soon as we have any clarity in that regard.
But as I said, we need to go through our own governance processes before we can commit to other timelines.
Okay, yeah, we do have one more question and basically recognizing that the review is based on data that was uploaded, which of course, you know, could have white noise as it's termed here.
Was there a validation process of any kind to make sure there were no misunderstandings that the data was interpreted correctly?
The point made here is that the credit union never got any inquiries, so is it safe to assume that that not being the case that anything found was not material?
I would answer that whenever we had to ask questions, we have asked them.
So the fact that there were no questions asked meant that information coming from the data as presented to us seemed clear enough.
Yeah, all I would add is that, and again, And this is going to become increasingly important as we move into the world where enhanced data collection is a thing.
Was there any validation is more a question for the credit unions than it is for us.
So what processes did you go through before uploading that data to make sure that the data was clean, that it was accurate, that it was complete?
Is a question that you'll hear us increasingly asking you.
I think the other thing to emphasize is that none of our analysis is based on a single data point.
And so as Dan said, where something seemed to be wildly out of place, given the other information that was received, that those questions were asked.
And again, this is not your last chance to have a conversation about this.
And so as you go through that discussion with the supervision team on your individual results with respect to this, that conversation will be had again and in detail because while we are dynamic in the way that we change our ratings, we're also very careful to make sure that it's based in fact and on the right information.
So that conversation will happen.
Okay.
I think that's all the questions we have for now, and I think it's time to move on.
We do have a question period at the end, so I'll remind everyone if they do have any other questions relating to the thematic review, you can always enter them, and we can deal with them at the end.
But until then, Dan, I will hand it over to you your presentation on continuous supervision. Thank you Steve.
If we could move to the first slide of that presentation please.
The presentation will start with the principles, the origins of the continuous supervisory approach or continuous supervision because this represents a major departure from the experience of past regulatory regimes.
It's modern, but we want to make sure that the origins of this change is understood as well as what's actually the net new, because that is what's material to the whole ecosystem, the regulated sector, the participants and the supervisory process.
So then I will continue to the point where details will will be emphasized and even a hypothetical case of how continuous provision works in practice will be shown.
And then that will be just before questions, so hopefully we'll have a good discussion afterwards.
So at the beginning, the Fistra objects are the origin of our supervisory approach, promoting high standards of business conduct, protecting the rights and interests of consumers, And, last but not least, to foster strong, sustainable, competitive, and innovative financial services sectors.
So the emphasis on risk-taking by the institutions we prudentially regulate, the credit unions, differentiates between risks that are core and those that are non-core.
They are still inherent in the business, but they are not part of the revenue generation.
And the role of controls is very well established, But we emphasize this because what we get out of the data, the inherent risk picture, is then modulated with the assessment of the controls and the oversight.
And the word continuous applies to all of the above.
The inherent risk assessment as well as controls and oversight.
unlike in the past where those assessments were done much more point in time through examinations, the type of assessment that has evolved into comprehensive assessment.
And by now all of the institutions, all the credit unions in the sector will have had their comprehensive assessment completed.
So if we could move to the next slide, please.
Some of you who have participated in the directors' conferences will have seen this already, but think it bears emphasis because, further emphasis, because the role of the board is one of the differences between the current regime, the current supervisory approach based on the risk-based supervisory framework, which came in I believe two and a half years ago, or actually a bit more than two and a half years ago now.
And the role of the board is getting additional emphasis in our approach because we believe that if the board is providing good oversight to senior management, then of course senior management to operational management, then Fistra's objects of financial stability and enabling innovation and protecting the rights and interests of consumers and so on, they will have been met with no need for supervisory intervention as such.
So, the role of the board is not new when we read through the points.
However, what's new is our supervisor interaction with the board in a way that was much less in the past.
And I will not read through the slides, the slides will be shared, but the key point of this slide is that risk is also part of board oversight.
And for reference, the sound Business and Financial Practices Rule, FISVAS rule, makes that very clear.
If we could move to the next slide, please.
This slide shows a quick review of the risk assessment tools we have been employing as part of the Risk-Based Supervisory Framework implementation.
and the tools that contribute to building the risk profile and maintaining the risk profile of the institution of each institution.
We have now 55 all comprehensively assessed and these tools are shared between different incarnations of the supervisory assessment, whether it's comprehensive or thematic or targeted.
So in the panel on the right, you see the experience so far.
We have 55 comprehensive assessments for individual institutions, but we also have six thematic reviews.
Some, like the deposit taking and retail lending, covering all institutions because all of them are having those significant activities others like the commercial and you heard my colleague David talking about this only affect only involve a subset of the institutions only those that are engaged significantly in the object of the review.
So this way, this is another manifestation of our risk-based approach.
We only focus, we only engage institutions where there is a risk theme to discuss or assess.
And we'll talk a little bit more about this in the practical example I'll give at the end.
Let's move to the next slide, please.
What we learned from the 55 comprehensive assessments is summarized on this slide.
And the way to read this is the second number is always 55, that's how many assessments we've completed comprehensively.
But the themes of observations and reflected in the interim supervisory letters we issued to institutions, you can see the prevalence in the first number.
So if we operational risk management and resilience, we found things to recommend to 41 out of the 55 institutions that we have reviewed.
Now, the fact that we have made recommendations, say in enterprise wide board oversight, does not mean that the oversight is inadequate.
we take opportunities to create value by pointing out opportunities for enhancements and these are also considered in the supervisory letters and therefore in the themes that we have on this page.
Just to underline a point the bottom of the previous slide that the board is the main focus of supervisory activity.
You can see how 79% of our requirements and recommendations have been issued to the board and why we keep emphasizing this because this cannot be delegated to senior management. The board remains accountable.
Of course the actual work, the responsibilities assigned to senior management, but the accountability remains to the board. If we could move to the next slide, please.
So after completing the 55 comprehensive assessments, what are we going to do?
Well, our strategy in 2025 and beyond is to continue emphasis on the board oversight through a continuous interaction between boards of credit unions and FISRA's supervisors.
The interaction is continuous in the sense that any new information emerging whether gleaned from a board pack or some major something that happens outside in the environment.
The supervisor would reach out to board directors, board chairs, chairs of committees, but also in the opposite direction if any board member or board director from a credit union or chair has any concern or wants some clarifications, we are operating a 24-7 regime.
Anybody from the board can reach out to the supervisors anytime, so it's a two-way interaction.
Both sites can initiate communication.
We monitor the financial performance just like we have been.
This is a common part with previous regimes, but something new is the fact that we perform stress testing and scenario analysis based on the data collected from the institutions.
Sometimes the results are discussed with institution if the results may look concerning.
And that would be again a discussion, a conversation, because it's quite likely that institutions perform their own stress testing and scenario analysis and we want to have this constant two-way level setting between the institutions and the supervisor.
This comes in quite useful in situations like fostering collaboration.
I just came back from a three-day trip through southwestern Ontario talking to credit unions in that area and I learned a lot in terms of potential for fostering collaboration where the supervisor's Fistra would be helpful and again in our 24-7 regime that is, this is an ongoing conversation.
The second point on the last, the continuous supervision, it makes the point of, it's a good description in my view of the new regulatory regime, the new supervisory method.
It's both high-tech with very detailed data and a lot of analytics, but also high-touch, the always open method that I described before.
And this is not limited to the board, CINI management as well, but we have a much longer experience of interaction between supervisory staff and CINI management.
that now extends to the board. If I could have the next slide please.
The expectations on both sides because I talked about the process but what's what's to expect from our side we need the board materials and the attendance and so on, because this is part of the basis of this interaction.
We need to know as much as the boards that we interact with.
Without this full transparency, of course, the conversation would be less effective and more laborious, not efficient.
So you will have seen requests to either provide the relationship managers with the board materials, submitting them to the secure portal, or just access.
Some institutions use third-party providers like Apprio to store the board materials and give access to the individual directors.
We just request access to the same materials.
so to have the same information as the board directors that we'll be talking to.
And at this point I would like to emphasize the individual directors fiduciary duty because each director being elected by the members direct election means that each director needs to discharge their fiduciary duty as best they can, and that includes through direct contact with the regulator.
Traditionally, this is not viewed as the done thing, because by analogy with senior management the the CEO or or CFO and so on would be assumed to be the point of contact with the regulator but the board functions differently it's not the it's not a pyramid that's why we emphasize the individual directors fiduciary duty and we have learned a lot from talking to individual directors that we have started recently.
And we got some feedback that individual directors have learned a lot from talking directly to us.
And of course, the board chair and committee chairs have their own role in this, but the direct contact between directors, individual directors, board members, and the regulator is definitely something new. So I wanted to make this point of emphasis here.
On the board director's expectation, the relationship managers are always there to answer questions and engage in the two-way conversation I described.
And also, another point that Ben is mentioning is that the outcome, the supervisory outcome is subject to stringent quality assurance and supervisory support.
So there is, there's teams of people involved in arriving at a supervisory decision. It's not just a relationship manager.
They that is provided to us.
So they have the support of senior technical leads and senior risk analysts for processing the quantitative and quantitative information, but also their views, their decisions are supported by their directors, by myself, the head, and by the executive vice president of the division.
Now, if I could move to the next slide, we are coming to the more detailed part of my presentation.
There's three slides where we explain in more detail what continuous supervision and monitoring is.
You've seen the reference to comprehensive assessments, targeted assessments, thematic reviews, and monitoring.
all of them form part of continuous supervision.
So when necessary, we will perform, as we have performed, a comprehensive assessment.
But the efficient way to go about it is to use targeted assessments, targeted to a specific activity, be it retail lending or capital management, very well targeted and of course only one institution.
The mirror image if you want is the thematic review where an issue of concern to the sector as a whole or to a large group of institutions in the sector triggers this kind of review that is, as the name says, themed on, and you have experienced the retail lending review, the deposit-taking review, the commercial lending review recently.
Monitoring is not just monitoring financial performance, but monitoring all pertinent information, including the macro environment.
So when we hear, for example, yesterday Bank of Canada lowered the target rate by another 50 basis points, we will assess its impact, the impact of this event, on all credit unions through the analytics we have developed in-house.
So not all institutions will be affected the same way, we will perform that analysis through no change in a credit union but a change in the environment.
Likewise, if a key member of the city management team leaves the institution, part of monitoring is to become aware of that change and assess its potential impact on the institution.
So, on the right panel you see in text what I just said.
We review all information about the credit union and the industry and everything else in the environment, anything that may impact an institution, and we review and update our supervisory assessment of the risk profile in near real time and of course the two-way communication that I described in earlier slides will make the institution aware of any potential changes in our thinking.
If we could go to the next slide please.
This slide summarizes why do we switch to a continuous assessment methodology.
You will have read in the risk-based advisor framework material on the FISRA website that ratings need to be updated any time material information comes to light and changes the risk profile of the institution.
Those updates are both potential and possible in both directions.
One, something adverse happened and the risk profile of the institution has increased.
It doesn't make sense to leave the risk rating at the previous level, the pre-change level, so it would have to be increased.
The opposite example, let's say that the institution has been assessed as a higher level of risk, and it's got some recommendations from us.
The moment the recommendations get fully implemented, of course, the risk profile has gone down, and the rating should reflect that as at the time of completing the action, rather than wait for some point in the future, perhaps for a comprehensive assessment.
That's a critical part of our methodology, the responsiveness, the dynamic nature of the supervisory work, the risk assessments, and the communication with institutions.
The interim supervisory letter, you have seen so far one, but if you have seen a second supervisory letter, but this is the, let's say, official record of communicating changes in the supervisory ratings, the overall risk rating and intervention level.
So, there is constant communication, but anything that changes the rating will be done formally through the interim supervisory letter.
That can contain also an acknowledgement of closing or meeting recommendations and requirements made in previous interim supervisory letters.
And if we could go to the next slide, please.
This is the example that should bring it all together, because you see a timeline, starting with a comprehensive assessment and going into the future.
This is something that a good number of institutions will have observed, because in the first year After the introduction of the risk-based supervisory framework, we performed, I believe, 15 comprehensive assessments.
So 15 institutions will have had their baseline set in the first year of RBSF.
But then one external event happened, the crisis in Silicon Valley Bank and the impact on the environment that that crisis created that's been contagion or within the United States but also across the border.
So we had to assess the state of liquidity in credit unions that we regulate and therefore we issued a data request.
You see that point in time and we performed the assessment of liquidity the sector on a much more frequent basis than before.
In fact, we started with daily assessments and then we decreased the frequency once we observed that the liquidity levels in the sector have returned to normal levels.
We have maintained, however, more frequent liquidity assessment in specific cases where we found that this is more appropriate.
And you see another element, the interest rates that have gone up very sharply in 2022 and close to 2023 have started recently to come down.
They have, as I said in previous slides, triggered reassessments of the risk profiles of institutions.
what do they mean for balance sheets of individual institutions.
Another type of event is the revision of the B20 guideline by OSFIE where more restrictive measures have been introduced like caps on the loan to income and the prohibition of certain types of lending and facing a policy question whether we should follow OSFIE or not, we have collected the evidence through the thematic review, so that we get the thematic review for residential mortgage lending and deposit taking, so we can arrive at an informed position for our ISAR policy towards credit unions.
And as you know, the decision was not to follow OSFIE in restricting the business of credit But that decision was based on very sound evidence provided by the credit unions and our analysis of it.
A similar activity is being performed in a targeted way in specific institutions in capital and liquidity.
Where we observed, you can see back with the liquidity data request, the more in-depth analysis we performed there that a small number of institutions should be assessed in-depth in these specific areas, not in the lending area, but specifically in capital and liquidity.
That's what the targeted assessment does.
And this, for a small number of institutions, has been the experience over the past two years.
So they got comprehensively assessed, they got a liquidity assessment, they done the thematically review and then targeted review as well.
All along monitoring has been conducted in parallel with these activities and complementary to these activities.
I'm sure there'll be questions, I can't wait, so let's go to last slide, the key takeaways.
Again, the emphasis on the increased accountability for the board and the principle-based regulatory regime that we have.
The other side is that credit unions have more flexibility to tailor their strategy, and not only the local circumstances, but also changing circumstances.
We heard of potential tariffs introduced against Canadian exports to the United States.
That definitely impacts some credit unions.
The CCPA and the principal-based regulatory regime enables credit unions to change their flexibly to be able to respond to such changes in their environment.
And the second key takeaway for us is that board directors and scene management are encouraged to engage in a bilateral transparent and open communication with ISRA any time they have any concerns and we will do the same.
We question time. Thanks Dan for that presentation.
Yes we've reached the question period so if you have any questions about the continuous supervision presentation or any remaining questions from the first presentation on commercial lending thematic review please enter those in.
We have a few questions so I'll begin with a question for David or David can kick this one off.
So somebody has stated that they are interested in fostering a cooperative relationship with FISRA, in the context of continuous supervision model, where information is disclosed by the credit union, whether formally or informally, can be potentially used against them in administration proceedings, how does FISRA intend to foster open communication and trust while balancing its important responsibility to ensure adequate regulation and compliance?
Yeah, that's an excellent question.
And I think it speaks to sort of the fundamentals of a principles-based approach, right? Because we talk a lot about a collaborative approach.
We talk about trust and fostering that trust on both sides and transparency.
There is another end to that spectrum where we do have certain powers under the act in order to be able to Well, let's just say that after a certain point in time, there is the potential for the relationship with the credit union to move from one side of that spectrum of activity to the other.
What I will say, and I'm not sure if Dan agrees with me on this, I would say this is my view rather than Fizer's view, but we're ultimately, through supervision, through continuous supervision, the goal is to change behaviors and ultimately drive towards shared desired outcomes of resilient credit unions, a resilient sector, confidence in that sector.
And so if you are and your credit union is fostering an open and transparent relationship and sharing information, that really is the behavior that we're looking to drive.
And then we can then collaboratively address any issues that are being raised.
I think there are ultimately, from an administrative perspective, I can't think of any situations that can't be resolved through a truly principles-based and collaborative approach.
And so to the extent that we have exercise powers in the past, it has been when there were impediments to an open and transparent relationship.
So I think by fostering the type of relationship that you say you're looking to foster, you really take away a lot of the risk of potential administrative consequences.
Dan, I'm sure you'll have something to add to this.
Well, I would thank Dominic for his question And I point out that this is probably coming from some past experience or some direction because in theory, yes, what would happen if we end up in court, but we don't prepare to go to court.
we prepared to have a continuously good relationship between the regulated entities and the regulator.
And remember, we started with the object fostering a strong, stable, innovative, and competitive sector.
It's got nothing to do with going to court.
And in theory, we need to think about it.
But I think those thoughts get in the way of fostering this collaborative relationship.
And I would keep the emphasis on that.
Just like David said, there's so much to do in this direction.
I would also want to give Ellen a chance because she's had her hand up for a little while.
So, Ellen, would you want to ask question?
the question by typing it or just I think that's the only way actually the way the webinar is run. So while you make that decision I'll hand that to Steve.
I'll take it Dan. So the next one's actually a question for you.
You can leave this one off.
So this one is can you provide additional context on FISRA direction to receive board documents at the time of distribution to members versus after the meetings which is consistent with OSFEE approach.
Right so consistency with OSFEE with the OSFEE approach is a common theme.
Institutions ask us if we are consistent with OSFEE.
We have not been asked to be consistent with OSFEE when OSFEE introduced restrictions to lending.
So So I guess that principle got invalidated.
We are going to be consistent with the interests, the best interests of the credit unions we regulate rather than with OSFIE.
And with regard to the method of having access to documents, the board documents, I would bring back the purpose of this fostering transparent and open collaboration.
Now if we're to aim for that, offering the information later to the other side of the conversation would constantly hamper the relationship.
It's one side of the conversation gets the information we can advance or even before the fact and the other side gets it after the fact.
That I would say is more of a compliance view where the information is presented just to check things that have already happened.
But without having the information before the conversation, we won't get a chance to help.
Maybe I'll just add, Dan, that there's a practical element here too.
We want to be able to review these board packages and then have a quarterly meeting with either your management team or your board in fairly short order when these issues are still fresh and when we can still have a conversation.
Because again, as we're inquiring about the board package, we're looking to get more insights into the conversation, into the questions that were asked and I think that kind of stuff tends to fade over time and so by requesting them for when they're first posted, it allows us to have more productive meetings following the board meeting itself when the issues are fresh for everyone.
Thanks David.
I will also say that having worked in OSPI's corporate governance division, those banks complained endlessly about not being able to just send materials when they were posted for directors. So it seems that OSPI's approach is not always popular either.
Thank you both.
So next question we have is, with what, Dan, this one's for you, with what Can credit unions expect interim supervisory letters and specifically is there a maximum interview interval before a new one is issued?
I believe there is so thanks John.
The supervisory letters, the interim supervisory letters get issued if there is a reason.
Now if an institution has really nothing to recommend because they are well run, changes in the environment, don't affect them that much, it's all fine.
We're not going to create needless communication, needless work.
There would be a yearly confirmation of the rating because that into the DPS assessment and a premium setting.
So I understand that this is how it's going to be. Brad, if you could confirm that. Sorry, my mic wasn't working.
I apologize. Yes, Stan, that is correct. Thank you.
All right, we will go to the question here.
I think we'll, Dan, unless David wants to jump in, I'll let, I think this one's for Dan as well, so. Yeah, so thanks, thanks Andy.
Now I didn't say that you should not, the credit union should not take interest rate risk.
I was saying that this is not core. It's inherent in the business.
You take deposits usually a shorter maturity than the loans you're making.
That's clearly the case.
It's built into, the maturity transformation is part of deposit taking and lending.
However, it's not rewarded as such.
It's not, there's no margin to be made in interest rate risk management.
And if there was, then that would not be a banking book, that would be a trading book.
So each institution has its own way to manage interest rate risk, just like IT risk.
Think of them as non-core risks that are inherent to today's banking operations, but they just need mitigation.
They need risk control and an appropriate capital reserve because they are inherent.
You can't say, I can't take this.
You have to.
That's the nature of the business.
Thank you, Dan.
So our next question is, what efficiencies can credit unions expect from continuous supervision activities?
Will annual assessments become less resource intensive for credit unions over time if there ongoing dialogue and monitoring? I can start on this one.
I think first off, you know, assessments will look a little different in that they may not appear to be annual assessments.
There will be a regular cadence of meetings. There will be all of the activities that Dan described.
I think Efficiencies will be experienced by credit unions that can demonstrate that they are effectively managing their risks.
The purpose of this exercise is to devote our attention to the issues and credit unions that are of higher risk and have the potential to impact the resilience of that credit union or the sector overall, and our activities will reflect that.
And so I think, again, I think that's probably the simplest way to state it.
This process will be more efficient for the credit unions that take the time to evidence appropriately the actions that they are taking to effectively manage their risk and demonstrate that they're the outcomes that we've laid out. Anything to add there, Dan?
Yeah, I would refer back to John's question about the maximum time between interim supervisory letters.
There have been, there are institutions that have experienced already the, not lack of recommendations or requirements coming out of the supervisory assessment, just mere observations, and they continue to do a good job running the credit union.
It's not much to interact about really.
We get regular updates with data we get the access to board packages and that those things confirm that the institution is continuing to be the same risk profile that we assessed at the baseline assessment so yeah if the institution doesn't reach out to us because they want to talk to us about something we will just have the regular cadence of talking to senior management in the board, but that's it. That's it.
And one letter a year to confirm the DPS premium.
At the other end of the spectrum, yes, there have been institutions that got off the watch list and back on the watch list, and they're about to get off the watch list again in the of probably 18 months.
So it's a very, very dynamic style of interaction, a very dynamic environment.
We see it, we experienced all of us every day, and our supervisory method just reflects this dynamism.
So the experience of individual credit unions will vary quite a lot in this new regime.
Yeah, and because the question was on efficiencies, the institutions that, in fact, all institutions will see that it's not an ever-increasing cadence of comprehensive assessments, all hands to the pump and so on, and again, the data that we collect is used for a multitude of purposes.
you should not see multiple data collection for multiple purposes.
That's the purpose of collecting detailed data once and the regulator uses that multiple times.
Capital assessment, DPS assessment, supervisory monitoring, all from the same data set, which is efficient. Thank you.
So we have a couple of that have come in asking about the cadence for FISRA meeting with with board and senior management. Will these be quarterly meetings?
How often will these touch points be through a given year? I can start this one.
There is a certain cadence that's established with individual institutions that's usually quarterly because that's a quarterly update that's usually the update to the board as well.
So the cadence is not driven by us but is driven by the updates that the boards get from their senior management.
So that's the regular cadence.
If institutions meet less frequently, we just follow that.
Where necessary, we supplement that regular cadence with ad hoc interactions, and we keep those quite targeted, not involving, you know, casts of thousands, because we'll be talking for a purpose and we'll focus the conversation on just the people we need to talk to.
Yeah, I think the only thing I'd add to that, Dan, is that I think more and more these interactions are being initiated by credit units rather than by ourselves and I think that's that's a very positive development.
So the regular cadence is one thing and again that will be quarterly in most cases although we are risk-based and there may be things happening elsewhere that that lead to us meeting with you perhaps you know maybe we miss a quarter because there's something else that's higher risk that's happening that's the nature of our work but again these and especially the ad hoc interactions initiated by whether it's CEO or a director, member of the management team.
I think those are becoming increasingly frequent and increasingly productive interactions.
Thank you.
So we have another question here, but I just want to ask all of the people online.
If you have any questions, please, please enter them in.
We have a few more minutes or up to a half an hour left.
If there are any questions that anybody has to ask us, available, but I'll go to our next question while we wait for more to come in.
So next question is dealing with how does FISRA process all of the information, the vast quantity of information that's being brought in or provided by the credit unions.
Who is doing this, how, and just asking for sort of an oversight or sort of an overview as to how we go through all of this information as part of supervision. Okay, well I can make a start on that as well.
In the words of one CEO I spoke to yesterday, Dan, I don't know how you do this.
So let me explain.
We have a number of senior risk analysts who have their own portfolio of institutions.
The analysis has been automated to a large extent.
We have developed those analytical tools in-house, so the same senior analysts have developed the tools with help from our IT department, and the automated analysis presents the analyst with a number of metrics that then they have to further analyze and put together in some context.
Then a discussion with the relationship manager ensues where the analyst presents the inherent risk profile of the institution updated with the latest information to the relationship manager.
The relationship manager makes a decision on the recommendation of the analyst whether the controls need reassessing, and for that we have senior technical leads specializing in credit risk management and so on, various risk stripes, and capital management and so on.
So the assessment involves the analyst for that credit union, potentially a senior technical lead, the relationship manager, and then we have the regular updates to level set and quality assure the decision.
So who does all of this work?
It's all senior risk analysts, the senior technical leads, the relationship managers, and the directors.
Just sort of one additional thing is that we do use everything that we collect.
And so I understand that it seems like a vast amount of data, but that data standard was developed with a lot of thought and a lot of experience driving it, and we do have the people, we have the tools, we have the models in order to be able to use all of it ultimately in order to better understand the sector. Okay, yeah, just waiting on some more questions to come in.
All right, we have one now.
So given the nature of continuous supervision framework, it can be challenging to when our client's rights to counsel arises, as it can be difficult to ascertain what an administrative proceeding formally begins.
Is FISRA comfortable with legal counsel being present at meetings with boards and staff during supervisory processes, and under what circumstances, if any, might their presence be restricted?
Do you like to start, Dan?
Yeah, thanks, Dominic.
Same spirit of the question as your previous question.
And that's fine.
We don't prepare for confrontation with institutions and we have specific guidance because this is a question that has occurred, has been asked, and we have specific guidance coming up with the right to counsel. This is a charter right.
I'm not a lawyer, I'm going to venture that way, but I understand this is a charter, right?
We are not going to interfere with that. Nobody's suggesting that.
But we'll have to be judicious and the guidance that we'll put out will explain how that will be achieved. Yeah, I will say the guidance is not imminent.
It will be a little bit of time before we sort of formally articulate that.
But I think, again, in the spirit of sort of transparent back and forth for now, just clarifying expectations in advance of every meeting, I think will solve a lot of problems.
Yeah, I mean, we are heading into a collaboration rather than the confrontation.
That's the default stance every single time we talk to credit unions. Right. We have a question here.
I will ask and answer this question.
So the question is asking, how would FISRA prefer getting feedback and questions about this presentation and materials following this webinar?
And as always, we would like all questions to go through relationship managers.
The relationship manager are the main points of contact between the credit unions and FISRA.
They need to know what's going on in all respects and they will direct the questions or get help from the rest of team to answer any questions that come in along the way.
All right, I'm not seeing any other questions at this point.
I'll give it another 15 seconds or so.
If not, we will wrap it up in a few moments.
Did Ellen ask a question?
She had her...
No, no, unfortunately, I've not seen anything.
I've had a side chat with her, but I have not received a response yet.
Okay, well, just while we wait, just to re-emphasize that our 24-7, always available supervisory approach means that after this webinar, anybody can reach out to us with follow-up questions, and we will be happy to answer and engage in a conversation if need be.
I would note that Dan said 24-7 approach to supervision.
and he's the only one on this webinar with supervision in his title.
I just want to make that clear.
All right, so at this point, I'm not seeing any other questions, so I will hand it off to Steve for some closing remarks.
Okay, thanks, Brad.
I'd like to just remind everybody that today's session has been recorded and we will be sending out a link to all participants in the coming days.
And with that, I would like to thank you for joining and thank you for your questions, which were excellent ones.
I trust that we have answered them to your satisfaction, but if not, as always and as Dan just indicated, please feel free to contact your relationship manager.
We value communication of any kind.
And with that, I hope you have found this section helpful.
I wish you a happy holiday season and a great rest of the day.