July’s OSFI discussion paper “Advancing Proportionality” introduces some important ideas which could be used in the regulation of credit unions in this province. Most significantly, the paper proposes four ‘tiers’, or categories, for Canada’s small and medium sized banks.
In the paper, the 66 institutions are segmented into four sub-groups; tailoring capital and liquidity requirements to align with an entity’s “nature, size, complexity and business activities”. Lesser requirements are set out for smaller and less complex banks. Notably, 22 institutions would be subject to only the basic capital and liquidity requirements.
BC has a similar diverse array of large and small credit unions. Over the last three years the CCUA and credit union leaders have used the word ‘proportionality’, but we have failed to really outline how the concept could be employed effectively. In particular, the CCUA has not set out how the concept could be embedded into the coming amendments to the Financial Institutions Act, or regulations. The OSFI paper provides a guide.
The BC regulator often states that regulatory expectations will be adjusted to reflect a credit union’s size and complexity, but it is unclear just how this is done. In this existing model, proportionality appears to be applied or interpreted by FICOM staff on a case by case basis. This leaves small and mid-size credit unions in a difficult position because the expectation or standard is not clear.
OSFI’s proposed categories provide clarity and transparency in the definition of key regulatory requirements. The approach also provides an overview matrix which places the components in context.
In BC, existing asset groups could be used in a similar manner to scale the risk management expectations, and the related regulatory burden. FICOM has asserted the need for several changes to reporting and management in recent years; Risk Appetite Statements, Internal Capital Targets, ICAAP, Liquidity Coverage Ratio, and Net Cumulative Cash Flow. From my perspective, a tiered approach to these, as set out by OSFI, would be a fairer and more effective way to proceed.