OSFI – Guidance – Assessment of Regulatory Capital Models for Deposit-Taking Institutions

January 29, 2021 – OSFI issued guidance to meet approval standards for new and modified internal capital models. Credit risk IRB models, market risk IMA models, and counterparty credit IMM models.

Applicable to firms with standing approval of models, as well as to new applicants. Outlines acceptance standards framework, principles, and bespoke direction for new applicant internal model readiness, and for existing firms’ added or modified models. Includes detailed guidance on materials required for submission, expectations if models are changed post-submission, and decision process / ongoing monitoring. Models for regulatory capital purposes must align with Capital Adequacy Requirements.

New Applicants
Internal model accreditation for new applicants is managed via a three-phase review. The first phase – “exploratory”, is iterative, with the OSFI, to review model development. The second phase, pre-application readiness, assess production-ready models by four components: a) implementation, b) suitability and assumptions, c) oversight, and c) self-assessment. The third phase, full application, after pre-application is approved, to evaluate the model methodology, governance, oversight, and management ability to address model shortfalls.

Accredited Firms
New models include model rebuild, model development to address new or changing regulatory standards (e.g. FRTB), or new models extending RWA to new risk factors. Model modification approval required when internal qualitative materiality threshold is triggered, or modification adversely impacts RWA or CET1 over the quantitative threshold. Added guidance provided to apply models to a firm’s business or portfolio acquisition. Where standardized approach must be applied until internal model approval is granted.

For more information, visit www.osfi-bsif.gc.ca.

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