OSFI.SupFrm

Reading: “Supervisory Framework,” December 2010

Authour: Office of the Superintendent of Financial Institutions Canada (OSFI)

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BA Quick-Summary: Supervision of Financial Institutions This is a foundational paper for how OSFI supervises financial institutions, but seems to be of minor importance for this exam. (It covers some of the same topics as OSFI.TargCap.)

BattlePlan

Based on past exams, the main things you need to know (in rough order of importance) are:

• key principles

Since there haven't been a lot of exam questions, you should probably do a little more here than learn the answer to the questions below. We're very much getting into the low-ranked papers now, so don't overdo it. There is actually a lot that could be asked from this paper, but it seems the examination committee doesn't regard it as important. That could change, but for now, just play the odds and spend the bulk of your time on the high-ranking papers.

Questions held out from Fall 2019 exam: #1. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)

reference	part (a)	part (b)	part (c)	part (d)
E (2016.Spring #4)	relationship manager: - responsibility	key principles: - risk assessment	risk management: - quality of

In Plain English!

Intro and Key Principles

• This reading covers OSFI's risk assessment process for FRFIs. It is a principles-based approach to ensure risks are adequately managed. There are 7 principles, 9 primary concepts, and 3 core supervisory processes. It's a well-organized reading, but it's hard to know what to focus on. It's probably a good idea to memorize 2-3 key principles, 2-3 primary concepts, and the 3 core supervisory processes.
• The first time it ever appeared on an exam was (2016.Spring #4abc). This indicates it is not considered an important reading.
  • Part (a) asked for the defn of a relationship manager. (The answer is on page 2 of the reading, and also in the BattleQuiz.)
  • Part (b), predictably, asked you list 3 of the key principles.
  • Part (c) came from the section on primary concepts, which is discussed in the next section.
• There are no deep concepts here. Everything you need to know is in the mini BattleQuiz below.

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Primary Concepts

• I was a little surprised by part (c):
  • Identify and describe two levels of control that OSFI uses to assess the quality of risk management. Answer in mini BattleQuiz.
  • There are 9 primary concepts, and quality of risk management refers to concept #3. So, it wasn't enough to have memorized 2-3 of the 9 primary concepts. You had to specifically know concept #3. Unless you memorized the whole reading, I don't see how you could have known the answer. (I really don't think it was a good question.)
• I stand by my earlier advice to memorize a few of these primary concepts, then hope for the best:
  • Concept #1: significant activities - anything fundamental to the business model (LOB,...)
  • Concept #3: quality of risk management and 2 levels of control (operational, oversight)
  • Concept #9: risk matrix and CRR (Composite Risk Rating)

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Core Supervisory Processes

• planning execution, reporting & intervention

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Tying it all Together

• This reading felt like a series of disconnected facts after I'd read it, so I thought about how it all ties together and here's what I came up with:
  • The fundamental concept in OSFI's supervision of risk assessment seems to be significant activities. The first step in OSFI's assessment is to identify all significant activities. Everything follows from that.
  • Specific steps that OSFI follows:

Step 1:	identify significant activities
Step 2:	assess inherent risks and quality of risk management
Step 3:	calculate Net Risk for each significant activity using Appendix C
Step 4:	use risk matrix to assess intervention status and CRR (Composite Risk Rating) - Appendices D & E

• Example: (This is not in the reading - I made it up to help me understand it better.)
  • Suppose an insurer sells exclusively earthquake insurance in Yorkton, Saskatchewan, and their management team is moderately experienced. Assess their composite risk rating and the likely intervention status.
    • Step 1: The significant activity is the selling of earthquake insurance.
    • Step 2: The inherent insurance risk is low (but not zero since there was a small earthquake in Yorkton in Sept 2016). The quality of their risk management team is acceptable.
    • Step 3: Using the table in appendix C, the net risk for this significant activity is low
    • Step 4: Using the risk matrix (appendix D), and appendix E, we see that CRR = low and the intervention status is 0 or normal.

• Alice thinks the example above would be a great Bloom's Taxonomy question!

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BattleCodes

• Memorize:
  • defn of relationship manager
  • 2-3 key principles of OSFI's risk assessment process
  • 2-3 primary concepts of OSFI's risk assessment process
  • 3 core supervisory processes

• Conceptual:
  • I would be surprised if the exam contained a question like the example in the "Tying it all Together" section. But for me, this is the best part of the whole reading. It's where you actually get to use your judgment to make an assessment of the company's risk management process. (The old exam questions are just memorization, but that's probably what will be asked, if this reading is asked at all.)

• Calculational:
  • I would include the assessment process as a calculation question, sort of. (There isn't anything specifically numerical.)

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