Standards of Sound Business Practice Regulation

Standards of Sound Business Practice Regulation, M.R. 89/2022 The Credit Unions and Caisses Populaires Act , C.C.S.M. c. C301 Regulation 89/2022 Registered June 24, 2022 bilingual version (HTML) Table of Contents Section PART 1 INTRODUCTORY PROVISIONS 1.1 Definitions 1.2 Insurance and bonding PART 2 CAPITAL ADEQUACY 2.1 Overview 2.2 Classes of capital established 2.3 Common equity tier 1 capital 2.4 Total tier 1 capital 2.5 Total tier 2 capital 2.6 Total eligible capital 2.7 Regulatory capital 2.8 Components of risk-weighted assets 2.9 Risk-weighting of consolidated balance sheet assets 2.10 Assets weighted 0% 2.11 Repealed 2.12 Assets weighted 75% 2.13 Assets weighted 100% 2.14 Assets weighted 150% 2.14.1 Securities of provinces other than Manitoba 2.14.2 Municipalities and public sector entities 2.14.3 Financial institutions 2.14.4 Corporate debt securities 2.14.5 Corporate equity, subordinated debt and other capital instruments 2.15 Mortgages against owner-occupied residential property 2.16 Mortgages against income-producing residential property 2.17 Agricultural and commercial loans 2.18 Off-balance sheet exposures 2.19 Interest rate hedging and foreign exchange contracts 2.20 Operational risk 2.21 Retained earnings ratio 2.22 Regulatory capital ratio 2.23 Common equity tier 1 capital ratio 2.24 Total tier 1 capital ratio 2.25 Total eligible capital ratio 2.26 Increased capitalization for D-SIFI institutions PART 3 LIQUIDITY 3.1 Overview 3.2 Minimum liquidity reserve requirements 3.3 Borrowing to meet reserve requirements PART 4 LENDING AND INVESTMENT 4.1 Overview 4.2 Test to apply 4.3 Lending and investment policies 4.4 Model Loan Policy 4.5 Scope of investment policies 4.6 Approval of investment policies 4.7 Guarantee corporation may require amendment 4.8 No loan or investment contrary to approved policies 4.9 Single borrower and systems aggregate loan limits 4.10 Limits on use of derivatives 4.11 Use of intermediaries 4.12 Matching policies PART 5 GOVERNANCE AND RISK MANAGEMENT 5.1 Overview 5.2 Credit union to comply with standards 5.3 Transitional provisions relating to investments 5.4 Coming into force Schedule PART 1 INTRODUCTORY PROVISIONS Definitions 1.1 The following definitions apply in this regulation. "common equity tier 1 capital" means a credit union's common equity tier 1 capital determined in accordance with section 2.3. (« capital ordinaire de première catégorie ») "connection credit" , in respect of a borrower who is a customer of a specific credit union, means the sum of the liabilities to the credit union by (a) the borrower; (b) the borrower's spouse or common-law partner; (c) any corporation or partnership in which the borrower has an interest; and (d) if the borrower is a corporation or partnership, (i) any person who meets at least one of the following requirements: (A) the person controls the corporation or partnership, or is the spouse of common-law partner of the person who controls it, or (B) collectively, the spouse, common-law partner and any dependant of the person own more than 30% of the shares in the corporation or interests in the partnership, (ii) the spouse or common-law partner and any dependants of a person described in subclause (i). (« crédit global ») "credit rating" means Standard & Poor's long-term issue credit rating or a credit rating from another rating agency that the guarantee corporation determines to be equivalent to Standard & Poor's long-term issue credit rating. (« cote de crédit ») "credit union" includes a caisse populaire. (« caisse populaire ») "fair market value" , with respect to any secured loan, means the total fair market value of all assets against which the loan is secured. (« juste valeur marchande ») "investment share" means a share in a credit union other than a membership share or a surplus share. (« part de placement ») "membership share" means a common share in a credit union purchased by a person for the purpose of becoming or remaining a member in good standing of the credit union. (« part de membre ») "OSFI" means the Office of the Superintendent of Financial Institutions of Canada. (« BSIF ») "regulatory capital" means a credit union's regulatory capital determined in accordance with section 2.7. (« capital réglementaire ») "Schedule" means the Schedule to these standards. (« annexe ») "small or medium-sized entity" means an agricultural or commercial enterprise with an outstanding connection credit of less than $1.25 million. (« entité de petite ou moyenne taille ») "surplus share" means a share in a credit union that is issued or allocated to a member as a patronage return or stock dividend on a membership share or surplus share. (« part de surplus ») "total eligible capital" , in respect of a credit union, means the credit union's total eligible capital determined in accordance with section 2.6. (« capital admissible ») "total tier 1 capital" means a credit union's total tier 1 capital determined in accordance with section 2.4. (« capital de première catégorie ») "total tier 2 capital" means a credit union's total tier 2 capital determined in accordance with section 2.5. (« capital de deuxième catégorie ») M.R. 22/2024 Insurance and bonding requirements 1.2(1) A credit union must maintain types and levels of insurance and bonding as determined by the guarantee corporation from time to time. 1.2(2) In determining the appropriate types and levels of insurance or bonding for a credit union, the guarantee corporation must take into account the risk profile of the credit union and the credit union's ability to absorb risks. PART 2 CAPITAL ADEQUACY Overview 2.1(1) This Part sets out the capital adequacy standards for credit unions as determined by examining the quantity and the quality of assets held by a credit union. This involves (a) establishing different classes of capital; and (b) applying a risk weighting to each type of asset held by a credit union. Based on the classification of capital and the risk-weighting of assets, financial ratios are then calculated, which must exceed the minimums set out in this Part. CLASSES OF CAPITAL Classes of capital established 2.2 The following classes of capital are established: (a) common equity tier 1 capital; (b) total tier 1 capital; (c) total tier 2 capital; (d) total eligible capital; (e) regulatory capital. Common equity tier 1 capital 2.3 A credit union's common equity tier 1 capital is determined in accordance with the following formula: A = B − C In this formula, A is the credit union's common equity tier 1 capital; B is the sum of the following: (a) retained earnings, (b) contributed surplus, (c) accumulated other comprehensive income, (d) deferred income tax liability, (e) revaluation loss on own-use property; and C is the sum of the following: (a) goodwill, (b) other intangible assets, (c) deferred income tax assets, (d) capitalized future margin income or gains from a securitized transaction that resulted in increased capital, (e) equity investments in unconsolidated entities in which the credit union has a minimum of 10% of the voting rights or a minimum of 25% ownership regardless of voting rights, (f) revaluation gain on own-use property, (g) gains on investment property included in retained earnings. Total tier 1 capital 2.4(1) A credit union's total tier 1 capital is the sum of the following: (a) the credit union's common equity tier 1 capital; (b) all consideration received for membership shares or surplus shares in the credit union that meet the requirements of subsection (2); (c) any declared or accrued stock dividends on membership shares or surplus shares referred to in clause (b) to be paid out in the form of additional membership or surplus shares that comply with subsection (2). 2.4(2) For consideration received in respect of a membership share or surplus share to be included in total tier 1 capital, the share must meet each of the following requirements: (a) the share is issued and fully paid for; (b) the share meets the following requirements for being a perpetual share: (i) the credit union's board of directors has, at its sole discretion, the right to refuse a shareholder's redemption request, (ii) the share has no maturity date, (iii) the share has no scheduled increases to the conversion price or incentives to redeem; (c) the share is subordinate to depositors, general creditors and other subordinated debt holders; (d) the share is not secured and is not covered by a deposit guarantee of the guarantee corporation; (e) dividends, if any, are paid out of retained earnings; (f) the right to receive dividends is subordinate to the right of any classes of shares that are neither membership shares nor surplus shares; (g) the share is not purchased, nor is the purchase funded, by the credit union or a related party that the credit union controls or over which it has significant influence. Total tier 2 capital 2.5(1) A credit union's total tier 2 capital is determined in accordance with the following formula: A = B − C In this formula, A is the credit union's total tier 2 capital; B is the sum of the following: (a) all consideration received for membership shares or surplus shares in the credit union that meet the requirements of subsection (2), (b) all consideration received for investment shares or securities other than shares, if those shares or securities meet the requirements set out in subsection (2), (c) all declared or accrued dividends on membership shares, surplus shares, investment shares or securities other than shares that are to be paid out in the form of shares or other securities that meet the requirements of subsection (2), (d) the amount of the credit union's allowance for doubtful accounts for loans not identified as impaired, to a maximum of 1.25% of the credit union's risk-weighted assets; C is the sum of the following: (a) the value of all investment shares that the credit union expects to redeem in a 12-month period, (b) the sum of the amounts obtained by multiplying the value of each security included under the description of B in the formula by one of the following discount factors based on the time to maturity for the security and adding those amounts: Time to Maturity Discount Factor Five years or more 0% Four years or more but less than five years 20% Three years or more but less than four years 40% Two years or more but less than three years 60% One year or more but less than two years 80% Less than one year [does not apply to investment shares already excluded under clause (a)] 100% 2.5(2) In order for consideration received in respect of a membership share, surplus share, investment share or other security to be included in total tier 2 capital, the share or other security must meet all of the following requirements: (a) the share or security is issued and fully paid for; (b) the share or security (i) has no maturity date, or (ii) has an original maturity of at least five years; (c) the rights associated with the share or security are subordinate to the rights of depositors and general creditors; (d) the share or security is not secured and is not covered by a deposit guarantee of the guarantee corporation; (e) the share or security has no scheduled increases to the conversion price or incentives to redeem; (f) the share is not purchased, nor is the purchase funded, by the credit union or a related party that the credit union controls or over which it has significant influence. M.R. 22/2024 Total eligible capital 2.6 A credit union's total eligible capital is the amount determined based on the following formula: A = B + C In this formula, A is the credit union's total eligible capital; B is the credit union's total tier 1 capital; and C is one of the following amounts: (a) if the credit union's total tier 1 capital is at or above the 8.5% total tier 1 capital ratio required by section 2.24, C is the credit union's total tier 2 capital, (b) if the credit union's total tier 1 capital is below the 8.5% tier 1 capital ratio required by section 2.24, C is the lesser of (i) the credit union's total tier 2 capital, or (ii) 2% of the credit union's risk-weighted assets. Regulatory capital 2.7 A credit union's regulatory capital is the sum of (a) the retained earnings of the credit union, calculated without including (i) revaluation gain or loss on own-use property, or (ii) gains on investment property; (b) contributed surplus; (c) all consideration received for issuing shares; (d) all consideration received for securities other than shares, if those securities meet the criteria for being included in total tier 2 capital under section 2.5; and (e) all declared or accrued dividends on shares that are to be paid out in the form of additional shares. RISK-WEIGHTING OF ASSETS Components of risk-weighted assets 2.8 A credit union's risk-weighted assets consist of the following: (a) the sum of the book values of each consolidated balance sheet asset adjusted by (i) firstly, multiplying each amount by the appropriate risk weighting percentage for the asset determined in accordance with sections 2.9 to 2.17, and (ii) secondly, removing the impact of (A) revaluation gain or loss on own-use property, and (B) gains on investment property; (b) an amount included in respect of off-balance sheet exposures determined in accordance with section 2.18; (c) an amount included in respect of interest rate hedging and foreign exchange contracts determined in accordance with section 2.19; (d) an amount included in respect of operational risk determined in accordance with section 2.20. Risk-weighting of consolidated balance sheet assets 2.9 To risk weight a consolidated balance sheet asset held by a credit union, the book value of the asset must be multiplied by the risk-weighting percentage for the asset type determined in accordance with sections 2.10 to 2.17. Assets weighted 0% 2.10 A 0% risk weighting applies to each of the following consolidated balance sheet assets: (a) cash, including cash on hand, cash in transit, cash in automated teller machines and foreign currency valued at the current exchange rate; (b) deposits made with the central and interest accrued on those deposits, but not including shares in the central; (c) securities and interest accrued on securities that are issued or unconditionally guaranteed by the government or the Government of Canada; (d) [repealed] M.R. 22/2024 ; (e) mortgage package investments, including mortgage-backed securities and Canada mortgage bonds, guaranteed by a federally regulated mortgage insurer, as well as interest accrued on such investments; (f) equity investments in unconsolidated entities in which the credit union has at least 10% of the voting rights or at least 25% ownership regardless of voting rights; (g) the portion of loans and advanced lines of credit secured against residential mortgages insured by a federally regulated mortgage insurer; (h) the portion of loans and advanced lines of credit that are fully secured by (i) the Government of Canada or the government of a province of Canada, (ii) deposits in a credit union or another federally or provincially regulated deposit-taking institution, or (iii) federal or provincial government securities such as treasury bills; (i) an allowance for doubtful accounts for loans not identified as impaired; (j) a deferred income tax asset; (k) goodwill and other intangible assets. M.R. 22/2024 2.11 [Repealed] M.R. 22/2024 Assets weighted 75% 2.12(1) A 75% risk weighting applies to each of the following consolidated balance sheet assets: (a) consumer loans and advanced lines of credit not secured by residential mortgages, including any consumer credit card debt; (b) agricultural and commercial loans, including credit card debt, to small or medium-sized entities, net of any specific allowance for doubtful accounts. 2.12(2) Subsection (1) does not apply to a loan or line of credit under which a required payment is past due more than 90 days. Assets weighted 100% 2.13 A 100% risk weighting applies to each of the following consolidated balance sheet assets: (a) shares, debentures and other securities, including accrued dividends, in the central and other entities related to the credit union system; (b) consumer loans, including advanced lines of credit, that are past due more than 90 days and secured against uninsured residential mortgages; (c) agricultural, commercial and consumer loans, including loans to small or medium-sized entities and advanced lines of credit — net of any specific allowance for doubtful accounts — that are not secured against residential mortgages and for which (i) a required payment is past due more than 90 days, and (ii) the credit union has identified the loan as impaired and taken out a specific allowance for doubtful accounts that is equal to or greater than 20% of the outstanding loan balance; (d) the net book value of the credit union's fixed assets after accounting for depreciation and amortization; (e) any other investment or asset to which no risk weighting is assigned under these standards, including (i) deferred charges, (ii) prepaid expenses, and (iii) receivables, including accruals, for derivative contracts that result in a net receivable. M.R. 22/2024 Assets weighted 150% 2.14 A 150% risk weighting applies to agricultural, commercial and consumer loans, including loans to small or medium-sized entities and advanced lines of credit, that are not secured against residential mortgages — net of any specific allowance for doubtful accounts — for which (a) a required payment is past due more than 90 days; and (b) the credit union has identified the loan as impaired and taken out a specific allowance for doubtful accounts that is less than 20% of the outstanding loan balance. Securities of provinces other than Manitoba 2.14.1 The risk weighting for securities and interest accrued on securities issued or unconditionally guaranteed by the government of a province of Canada other than Manitoba is as follows, based on the credit rating of the province: Credit Rating Risk Weighting AAA to AA- 0% A+ to A- 20% BBB+ to BBB- 50% BB+ to B- 100% Rated below B- 150% Municipalities and public sector entities 2.14.2(1) The risk weighting for securities and interest accrued on securities issued or unconditionally guaranteed by a municipality or public sector entity is as follows, based on the credit rating of the municipality or public sector entity: Credit Rating Risk Weighting AAA to AA- 20% A+ to A- 50% BBB+ to B- 100% Rated below B- 150% 2.14.2(2) A 20% risk weighting applies to loans and financial lease agreements with or guaranteed by a municipality or public sector entity, net of any specific allowance for doubtful accounts. 2.14.2(3) The following definitions apply in this section. "municipality" means any of the following: (a) the City of Winnipeg; (b) a municipality that is continued or formed under The Municipal Act ; (c) a city, municipality or municipal financing authority continued or formed under an enactment of a Canadian jurisdiction other than Manitoba. (« municipalité ») "public sector entity" means any of the following: (a) an entity that is a school board, hospital, university or social service provider that receives regular financial support from the government or the government of a Canadian jurisdiction other than Manitoba; (b) an entity that is wholly owned by the government or the government of a Canadian jurisdiction other than Manitoba. (« entité du secteur public ») M.R. 22/2024 Financial institutions 2.14.3(1) The risk weighting for deposits of a financial institution and for securities and interest accrued on securities issued by a financial institution is as follows, based on the original maturity of the security or deposit and whether the security is a covered bond: Product Type Risk Weighting Three months or less to maturity on origination 20% More than three months to maturity on origination 40% Covered bond 20% 2.14.3(2) The following definitions apply in this section. "covered bond" means a bond issued under a registered program as defined in the National Housing Act (Canada). (« obligation sécurisée ») "financial institution" means (a) a financial institution, other than the central, that is federally or provincially regulated and licensed to take deposits and lend money in the regular course of business by (i) OSFI, or (ii) a provincial regulator of financial institutions; or (b) a federally or provincially regulated insurance company that is subject to prudential regulation. (« institution financière ») M.R. 22/2024 Corporate debt securities 2.14.4(1) In this section, "corporate debt security" means a bond or debenture that is issued by an incorporated entity, trust or fund. 2.14.4(2) A credit union may assign a risk weighting to a corporate debt security by applying (a) a 100% risk weighting to all corporate debt securities; or (b) a risk weighting to each corporate debt security, based on the credit rating of the entity that issued the corporate debt security, as follows: Credit Rating Risk Weighting AAA to AA- 20% A+ to A- 50% BBB+ to BBB- 75% BB+ to BB- or unrated 100% B+ or lower 150% Corporate equity, subordinated debt and other capital instruments 2.14.5(1) The risk weighting for an investment referred to in the first column of the following table is set out opposite in the second column: Type of Investment Risk Weighting Equity investment made pursuant to a government program 100% Subordinated debt 150% Corporate equity 250% Speculative unlisted equity 400% 2.14.5(2) Despite subsection (1), speculative unlisted equity that is a venture capital investment may be risk weighted as corporate equity if the credit union satisfies the guarantee corporation that the credit union has conducted sufficient due diligence on the investment and has or intends to establish a long-term business relationship with the client that issued the equity. 2.14.5(3) The following definitions apply in this section. "corporate equity" means a direct or indirect ownership interest, whether voting or non-voting, in the assets and income of a commercial enterprise that is not consolidated and that (a) is non-redeemable; (b) does not embody an obligation on the part of the issuer; (c) conveys a residual claim on the assets or income of the issuer; and (d) is not deducted from common equity tier 1 capital under clause (e) of item C in the formula in section 2.3. (« action d'entreprise ») "equity investment made pursuant to a government program " means an investment in corporate equity made pursuant to a program of the government or the Government of Canada that provides significant subsidies for the investment and involves government oversight and restrictions on the investment. (« placement en actions réalisé dans le cadre d'un programme gouvernemental ») "speculative unlisted equity" means a corporate equity investment in a private company that is held for short-term resale purposes or that is a venture capital investment. (« action non cotée spéculative ») "subordinated debt" means an instrument evidencing an indebtedness of an institution that, by its terms, provides that the indebtedness will, in the event of the insolvency or winding-up of the institution, be subordinate in right of payment to all deposit liabilities of the institution and all other liabilities of the institution except those that, by their terms, rank equally with or are subordinate to the indebtedness, and includes bail-in debt. In this definition, "bail-in debt" means a debt instrument that is issued by a bank declared by OSFI as a Domestic-Systemically Important Bank and that can be converted into common shares, as described in OSFI's Total Loss Absorbing Capacity Guideline, as amended from time to time. (« dette subordonnée ») M.R. 22/2024 Mortgages against owner-occupied residential property 2.15(1) A credit union may assign a risk weighting to a consumer loan secured by an uninsured residential mortgage against owner-occupied residential property for which no payment is past due more than 90 days by using the simplified approach set out in subsection (2) or the detailed approach set out in subsection (3), based on the outstanding loan balance as a percentage of fair market value. 2.15(2) The risk weighting under the simplified approach is as follows: Outstanding Balance as a Percentage of Fair Market Value Risk Weighting less than or equal to 80% 30% more than 80% 70% 2.15(3) The risk weighting under the detailed approach is as follows: Outstanding Balance as a Percentage of Fair Market Value Risk Weighting less than or equal to 50% 20% less than or equal to 60% 25% less than or equal to 80% 30% less than or equal to 90% 40% less than or equal to 100% 50% more than 100% 70% Mortgages against income-producing residential property 2.16(1) In this section, "income-producing residential property" means real property consisting of four or fewer dwelling units rented for residential purposes. 2.16(2) A credit union may assign a risk weighting to a consumer loan secured by an uninsured mortgage against income-producing residential property for which no payment is past due more than 90 days by using the simplified approach set out in subsection (3) or the detailed approach set out in subsection (4), based on the oustanding loan balance as a percentage of fair market value. 2.16(3) The risk weighting under the simplified approach is as follows: Outstanding Balance as a Percentage of Fair Market Value Risk Weighting less than or equal to 80% 35% more than 80% 75% 2.16(4) The risk weighting under the detailed approach is as follows: Outstanding Balance as a Percentage of Fair Market Value Risk Weighting less than or equal to 50% 30% less than or equal to 60% 35% less than or equal to 80% 45% less than or equal to 90% 60% less than or equal to 100% 75% more than 100% 105% Agricultural and commercial loans 2.17(1) Subject to subsection 2.12(1), a credit union may apply (a) a 100% risk weighting to all agricultural and commercial loans for which no payment is more than 90 days past due; or (b) a risk weighting to each agricultural and commercial loan for which no payment is more than 90 days past due, as follows: Loan Category Risk Weighting Loan secured by commercial or agricultural real estate that is not income-producing commercial real estate outstanding loan balance is less than or equal to 60% of fair market value 60% outstanding loan balance is greater than 60% of fair market value 100% Loan secured by income-producing commercial real estate outstanding loan balance is less than or equal to 60% of fair market value 70% outstanding loan balance is greater than 60% and less than or equal to 80% of fair market value 90% outstanding loan balance is greater than 80% of fair market value 110% Land acquisition, development and construction loan for land acquisition if the outstanding loan balance is less than or equal to 60% of fair market value 100% for a substantially pre-sold development or construction project 100% in any other case 150% Any unsecured commercial or agricultural loan or commercial or agricultural loan secured by assets other than commercial or agricultural real estate 100% 2.17(2) The following definitions apply in subsection (1). "income-producing commercial real estate" means commercial or agricultural real estate that secures a loan if the borrower's ability to service the loan materially depends on the cash flows generated by the real estate rather than on the underlying capacity of the borrower to service the loan from other sources. (« bien immobilier commercial productif ») "land acquisition, development and construction loan" means a loan to directly finance (a) land acquisition for residential or commercial development or construction purposes; or (b) the development or construction of a residential or commercial property. (« prêt pour l'acquisition de terrains, l'aménagement et la construction ») "substantially pre-sold development or construction project" means that (a) for residential construction projects with five or more stories, at least 50% of the units have been pre-sold; and (b) for all other residential construction projects, (i) pre-sale contracts amount to over 50% of total contracts, or (ii) equity at risk equivalent to at least 25% of the project's appraised as-completed value has been contributed by the borrower. (« projet d'aménagement ou de construction avec prévente importante ») M.R. 22/2024 Off-balance sheet exposures 2.18 A credit union must include its off-balance sheet exposures in its risk-weighted assets in accordance with the following formula: A = B × C In this formula, A is the amount to be included in a credit union's risk-weighted assets for each off-balance sheet exposure; B is the amount of the off-balance sheet exposure; C is the following: (a) for an unconditionally cancellable commitment, C is zero, (b) for a commitment with a term to maturity of less than one year, C is 0.2, (c) for a commitment with a term to maturity of one year or more, or for an off-balance sheet exposure not specifically mentioned in this section, C is 0.5, (d) for a guarantee of indebtedness or a letter of credit, C is 1.0. M.R. 22/2024 Interest rate hedging and foreign exchange contracts 2.19 A credit union must include its interest rate hedging contracts and foreign exchange contracts in its risk-weighted assets, in accordance with the following formula: A = B × C × D In this formula, A is the amount to be included in a credit union's risk-weighted assets for each contract; B is the notional principal of the contract; C is one of the following, determined based on the residual term to maturity of the contract: (a) for an interest rate hedging contract: Residual Term to Maturity Percentage less than one year 0% less than or equal to five years 0.5% more than five years 1.5% Operational risk 2.20 A credit union must include an operational risk component in its risk-weighted assets in accordance with the following formula: A = 12% × [(B + C) × 12.5] In this formula, A is the credit union's operational risk component; B is the average of the credit union's gross financial margin during its three previous fiscal years; C is the average of the credit union's non-interest revenue during its three previous fiscal years. FINANCIAL RATIOS Retained earnings ratio 2.21(1) A credit union must maintain a retained earnings ratio of 3% at all times. 2.21(2) A credit union's retained earning ratio is determined in accordance with the following formula: A = B/C In this formula, A is the credit union's retained earnings ratio; B is the sum of the following, adjusted to remove the impact of revaluation gain on own-use property and gains on investment property: (a) the credit union's retained earnings, (b) the credit union's contributed surplus; C is the total book value of the consolidated balance sheet assets of the credit union, adjusted to remove the impact of revaluation gain on own-use property and gains on investment property. Regulatory capital ratio 2.22(1) A credit union must, at all times, maintain a regulatory capital ratio of 5%. 2.22(2) A credit union's regulatory capital ratio is determined in accordance with the following formula: A = B/C In this formula, A is the credit union's regulatory capital ratio; B is the sum of the following, adjusted to remove the gain on own-use property and gains on investment property: (a) the credit union's retained earnings, (b) the credit union's contributed surplus, (c) all consideration received for issuing shares, (d) all consideration received for securities other than shares if those securities meet the criteria for being included in total tier 2 capital under section 2.5, and (e) all declared or accrued dividends on shares that are to be paid out in the form of additional shares; C is the book value of the consolidated balance sheet assets of the credit union, adjusted to remove the impact of revaluation gain on own-use property and gains on investment property. Common equity tier 1 capital ratio 2.23(1) A credit union must, at all times, maintain a common equity tier 1 capital ratio of 4.5%. 2.23(2) A credit union's common equity tier 1 capital ratio is determined in accordance with the following formula: A = B/C In this formula, A is the credit union's common equity tier 1 capital ratio; B is the credit union's common equity tier 1 capital determined in accordance with section 2.3; and C is the credit union's total risk-weighted assets determined in accordance with section 2.8. Total tier 1 capital ratio 2.24(1) A credit union must, at all times, maintain a total tier 1 capital ratio of 8.5%. 2.24(2) A credit union's total tier 1 capital ratio is determined in accordance with the following formula: A = B/C In this formula, A is the credit union's total tier 1 capital ratio; B is the credit union's total tier 1 capital determined in accordance with section 2.4; and C is the book value of the consolidated balance sheet assets of the credit union, risk-weighted in accordance with section 2.8 Total eligible capital ratio 2.25(1) A credit union must, at all times, maintain a total eligible capital ratio of 10.5%. 2.25(2) A credit union's total eligible capital ratio is determined in accordance with the following formula: A = B/C In this formula, A is the credit union's total eligible capital ratio; B is the credit union's total eligible capital determined in accordance with section 2.6; and C is the book value of the consolidated balance sheet assets of the credit union, risk-weighted in accordance with section 2.8. D-SIFI INSTITUTIONS Increased capitalization for D- SIFI institutions 2.26 If the guarantee corporation considers a credit union to be a Domestic-Systemically Important Financial Institution (D-SIFI), the guarantee corporation may require a credit union to increase its capitalization beyond the requirements of this Part. PART 3 LIQUIDITY Overview 3.1 This Part sets out the liquidity requirements for credit unions to enable credit unions to meet withdrawal requests. LIQUIDITY RESERVES Minimum liquidity reserves 3.2(1) A credit union must, at all times, maintain liquidity reserves of at least 8% of the sum of the following: (a) total deposits in the credit union; (b) interest accrued on deposits in the credit union. 3.2(2) For the purpose of subsection (1), a credit union's liquidity reserves consist of (a) cash on hand; (b) amounts deposited by the credit union into the central; and (c) any other deposits or investments made by the credit union that the guarantee corporation and the registrar consider eligible to satisfy the credit union's liquidity requirements. Borrowing to meet requirements 3.3 A credit union may meet any of its liquidity requirements by borrowing from its members, the central or any other entity approved by the guarantee corporation and the registrar. PART 4 LENDING AND INVESTMENT Overview 4.1 This Part sets out the lending and investment standards that credit unions must follow. The standards establish a "prudent person" test and require a credit union to develop lending and investment policies. In addition, this Part establishes certain lending and investment restrictions. PRUDENT PERSON TEST Test to apply 4.2 The board of directors of a credit union must establish, and the credit union must implement, lending and investment policies, standards and procedures that a prudent person would apply in respect of a portfolio of loans and investments to avoid undue risk and obtain a reasonable return. LENDING AND INVESTMENT POLICIES Lending and investment policies 4.3(1) A credit union's lending and investment policies must (a) be in writing; (b) require the credit union to consider its capital position, risk tolerance and ability to absorb losses when making a lending or investment decision; and (c) establish exposure limits to counterparty risk, market risk, interest rate risk, currency risk and any other type of risk that is material to the credit union. 4.3(2) The board of directors of a credit union must regularly review and reassess the credit union's lending and investment policies and amend them if the board considers it prudent to do so. Model Loan Policy 4.4(1) A credit union must base its lending policies on the Model Loan Policy established by the central's Central Credit Committee. 4.4(2) A credit union that adopts lending policies that deviate from the Model Loan Policy must advise the Central Credit Committee and the guarantee corporation of the deviation. 4.4(3) If a credit union's lending policies deviate from the Model Loan Policy, the guarantee corporation may require the credit union to amend them in a manner that makes them acceptable to the guarantee corporation. Scope of investment policies 4.5 A credit union must consider including each of the following in its investment policies: (a) limits on the total amount, or the percentage of the credit union's assets, that may be invested in different asset classes; (b) minimum quality parameters for assets to be invested in by the credit union, which may include the following: (i) for assets that are rated by a recognized credit rating agency, a minimum acceptable rating, (ii) for assets that are not rated by a recognized credit rating agency, internal evaluation criteria established by the credit union; (c) investment restrictions triggered by a failure of the credit union to meet the capital adequacy and liquidity requirements set out in these standards; (d) investment restrictions to limit or contain currency and interest rate risk; (e) the circumstances when derivatives are to be used to manage currency risk or interest rate risk. Approval of investment policies 4.6 A credit union's investment policies and any amendments to those policies must be approved by the guarantee corporation. Guarantee corporation may require amendment 4.7 The guarantee corporation may require a credit union to amend its investment policies to make them acceptable to the guarantee corporation. No loan or investment contrary to policies 4.8 A credit union must not issue a loan or make an investment that is contrary to its lending and investment policies. LOAN LIMITS Single borrower and systems aggregate loan limits 4.9(1) In this section, "liquidity assets" means the sum of the deposits in the credit union and the credit union's regulatory capital. 4.9(2) A credit union must not issue a loan to any borrower if the loan would result in the borrower's connection credit exceeding the specified percentage set out in subsection (3). 4.9(3) For the purpose of subsection (2), (a) if the borrower is a municipality, local government district, school board or hospital in Manitoba, the specified percentage is 10% of the credit union's liquidity assets; and (b) if the borrower is a person of a class not listed in clause (a), the specified percentage is (i) 5%, or (ii) 10%, if the portion in excess of 5% is (A) guaranteed by the Government of Canada or the government of a province of Canada, or (B) fully secured by a perfected security interest in deposits or securities of the Government of Canada, the government of a province of Canada, or a Canadian municipality. 4.9(4) A credit union must not issue a loan to a borrower if the collective exposure of all credit unions to that borrower exceeds the systems aggregate lending limit established by the guarantee corporation. RULE AGAINST SPECULATION Limits on use of derivatives 4.10 A credit union may purchase derivatives for the purpose of hedging currency risk or interest rate risk. But a credit union must not purchase derivatives for the purpose of speculation. PURCHASE OF DERIVATIVES Use of intermediaries 4.11(1) A credit union purchasing a derivative must do so by using the central or an entity approved by the guarantee corporation as an intermediary. 4.11(2) The guarantee corporation may make the approval of an intermediary subject to conditions. MATCHING Matching policies 4.12(1) A credit union must establish policies for matching the terms and returns of investments and loans made by the credit union with (a) the terms and returns of deposits in the credit union; and (b) any other liabilities of the credit union that are sensitive to changes in the interest rate. 4.12(2) If the guarantee corporation is not satisfied with a credit union's matching policies, the guarantee corporation may require the credit union to amend the policies. PART 5 GOVERNANCE AND RISK MANAGEMENT Overview 5.1 This Part sets out the governance and risk management principles a credit union must comply with. The principles are set out in a series of Governance and Risk Management Standards set out in the Schedule. GOVERNANCE AND RISK MANAGEMENT STANDARDS Credit union to comply with standards 5.2(1) A credit union must comply with the Governance and Risk Management Standards set out in the Schedule. 5.2(2) In determining how to comply with the Governance and Risk Management Standards, a credit union must have regards to the credit union's size, complexity and risk profile. 5.2(3) The guarantee corporation may publish guidelines and interpretive documents in respect of the Governance and Risk Management Standards and provide suggested approaches for compliance. TRANSITIONAL PROVISIONS AND COMING INTO FORCE Transitional provisions relating to investments 5.3(1) In this section, "credit union" does not include a caisse populaire. 5.3(2) A credit union or caisse populaire is exempt from the requirement to comply with sections 4.4, 4.5 and 4.6 of this regulation for a period of one year after the day this regulation comes into force. 5.3(3) During the one-year exemption period, a credit union must continue to comply with sections 16, 16.1 and 16.2 of the Credit Unions and Caisses Populaires Regulation , Manitoba Regulation 361/87, as it read immediately before its repeal. 5.3(4) During the one-year exemption period, a caisse populaire must continue to comply with sections 16.0.2, 16.1 and 16.2 of the Credit Unions and Caisses Populaires Regulation , Manitoba Regulation 361/87, as it read immediately before its repeal. Coming into force 5.4 This regulation comes into force on the same day that The Credit Unions and Caisses Populaires Amendment Act , S.M. 2021, c. 24, comes into force. SCHEDULE GOVERNANCE AND RISK MANAGEMENT STANDARDS FOR CREDIT UNIONS PART 1: Corporate Governance