Prudential Standards for Credit Union Central of Manitoba Regulation

Prudential Standards for Credit Union Central of Manitoba Regulation, M.R. 90/2022 The Credit Unions and Caisses Populaires Act , C.C.S.M. c. C301 Regulation 90/2022 Registered June 24, 2022 bilingual version (HTML) Table of Contents Section PART 1 DEFINITIONS 1.1 Definitions PART 2 CAPITAL ADEQUACY 2.1 Overview 2.2 Borrowing multiple 2.3 Total borrowings 2.4 Total capital 2.5 Increased capitalization for D-SIFI institutions 2.6 ICAAP components PART 3 LIQUIDITY 3.1 Overview 3.2 Liquidity risk management framework PART 4 LENDING AND INVESTMENT 4.1 Overview 4.2 Test to apply 4.3 Lending and investment policies 4.4 Liquidity reserve investment policies 4.5 Approval of liquidity reserve investment policies 4.6 Guarantee corporation may require amendment 4.7 No loan or investment contrary to policies PART 5 GOVERNANCE AND RISK MANAGEMENT 5.1 Overview 5.2 Central to comply with standards 5.3 Transitional provision relating to investments 5.4 Coming into force Schedule PART 1 DEFINITIONS Definitions 1.1 The following definitions apply in this regulation. "board" means the board of directors of the central. (« conseil d'administration ») "credit union" includes a caisse populaire. (« caisse populaire ») "ICAAP" means the internal capital adequacy assessment process established in accordance with section 2.6. (« PIDSC ») "member" means a credit union that is a member of the central. (« membre ») PART 2 CAPITAL ADEQUACY Overview 2.1 This Part sets out the capital adequacy standards for the central. Capital adequacy is determined by comparing the central's borrowings to its total capital and establishing a maximum borrowing multiple of 20 times total capital. In addition, the central must establish and implement an internal capital adequacy assessment process (ICAAP). BORROWING MULTIPLE Borrowing multiple 2.2(1) The central must not exceed a borrowing multiple of 20. 2.2(2) The central's borrowing multiple is determined in accordance with the following formula: A = B/C In this formula, A is the central's borrowing multiple; B is the central's total borrowings determined in accordance with section 2.3; C is the central's total capital determined in accordance with section 2.4. Total borrowings 2.3 The central's total borrowings are the sum of its deposit liabilities, loans payable, other liabilities and accrued interest on those borrowings, including the following: (a) deposits in the central made by a credit union, net of any outstanding loans or overdrafts granted to that credit union by the central; (b) bank loans to and overdrafts made by the central; (c) advances received from the Bank of Canada, the government or any other entity providing liquidity support to the central; (d) borrowings by a non-consolidated subsidiary of the central that are guaranteed by the central; (e) securities, bonds, notes, debentures and other debt instruments issued by the central that do not meet the requirements of subsection 2.4(2); (f) liabilities of the central related to derivative contracts, excluding liabilities incurred as a result of the central acting as an intermediary between a credit union and another party. Total capital 2.4(1) The central's total capital is the amount determined in accordance with the following formula: A = B – C In this formula, A is the central's total capital; B is the total value of the following assets, calculated on a consolidated basis: (a) retained earnings and contributed surplus, (b) shares issued by the central that are held by its members and that meet the requirements of subsection (2), (c) debentures issued by the central that are purchased by an entity to become eligible to place deposits with the central and that meet the requirements of subsection (2); C is the total value of the following assets, calculated on a consolidated basis: (a) the central's goodwill, (b) equity investments in unconsolidated entities in which the central has a minimum of 10% of the voting rights or a minimum of 25% ownership regardless of voting rights, (c) assets of little or no realizable value. 2.4(2) For consideration received in respect of a share or debenture issued by the central to be included in the central's total capital, the share or debenture must meet all of the following requirements: (a) the share or debenture is issued and fully paid for; (b) the share or debenture meets the following requirements for being a perpetual share or debenture: (i) theboard has, at its sole discretion, the right to refuse a shareholder's or debenture holder's redemption request, (ii) the share or debenture has no maturity date, (iii) the share or debenture has no step-ups or incentives to redeem; (c) the share or debenture is subordinate to depositors, general creditors and other subordinated debt holders; (d) the share or debenture 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 that of any class of share or debenture. Increased capitalization for D-SIFI institutions 2.5 If the guarantee corporation considers the central to be a Domestic-Systemically Important Financial Institution (D-SIFI), the guarantee corporation may require the central to increase its capitalization beyond the requirements of this Part. INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP) ICAAP components 2.6 The central must establish and implement an internal capital adequacy assessment process that includes (a) oversight by the board and by the central's senior management; (b) sound capital assessment and planning that focuses on the identification, measurement and evaluation of risk and its impact on capital requirements; (c) a comprehensive assessment of risks, including each of the following: (i) liquidity risk, (ii) concentration risk, (iii) diversification risk, (iv) operational risk, (v) market risk, (vi) interest rate risk; (d) stress-testing that evaluates the impact of potential events or changes in market conditions on the central; (e) a monitoring and reporting system that includes regular reports to senior management and to the board. PART 3 LIQUIDITY Overview 3.1 This Part requires the central to establish a liquidity risk management framework and sets out the requirements for that framework. Liquidity risk management framework 3.2 The central must establish and implement a liquidity risk management framework that includes the following: (a) liquidity risk tolerances approved by the board of the central; (b) a robust framework to identify, measure, manage and monitor the liquidity requirements of credit unions and of the central itself, including both of the following: (i) the capacity to conduct analyses of changes to funding requirements under identified stress scenarios, (ii) a cushion of unencumbered, high quality liquid assets, (c) contingency funding plans that reflect the outcomes generated from systemic liquidity stress testing; (d) a funding strategy involving diverse funding sources; (e) active participation in risk management by and the sharing of information between the central and credit unions. PART 4 LENDING AND INVESTMENT Overview 4.1 This Part sets out the lending and investment standards that the central must follow. The standards establish a "prudent person" test and require the central 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 must establish, and the central must implement, lending and investment policies, standards and procedures that a reasonable and 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) The central's lending and investment policies must (a) be in writing; (b) require the central 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 the central. 4.3(2) The board must regularly review the central's lending and investment policies and amend them if the board considers it prudent to do so. Liquidity reserve investment policies 4.4 The central's investment policies that relate to its role as manager of credit union liquidity reserves must (a) establish limits on the total amount, or the percentage of the central's assets, that can be invested in particular asset classes; (b) establish minimum quality parameters for assets the central may invest in. including (i) for assets that are rated by a recognized credit rating agency, a minimum acceptable rating, or (ii) for assets that are not rated by a recognized credit rating agency, internal evaluation criteria established by the central; (c) establish investment restrictions to be triggered by a failure of the central to meet the capital adequacy requirements set out in these standards; (d) establish investment restrictions to limit or contain currency and interest rate risk; (e) set out the circumstances when derivatives are to be used to manage currency risk or interest rate risk; (f) address any other matter required by the guarantee corporation. Approval of liquidity reserve investment policies 4.5 The central's investment policies that relate to the central's role as manager of credit union liquidity reserves, as well as any amendments to those policies, must be approved by the guarantee corporation. Guarantee corporation may require amendment 4.6 The guarantee corporation may require the central to amend its investment policies that relate to the central's role as manager of credit union liquidity reserves to make them acceptable to the guarantee corporation. No loan or investment contrary to policies 4.7 The central must not issue a loan or make an investment that is contrary to the central's lending and investment policies. PART 5 GOVERNANCE AND RISK MANAGEMENT Overview 5.1 This Part sets out the governance and risk management principles the central 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 Central to comply with standards 5.2(1) The central must comply with the Corporate Governance and Risk Management Standards set out in the Schedule. 5.2(2) 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 provision relating to investments 5.3(1) The central is exempt from the requirement to comply with sections 4.4 and 4.5 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, the central must continue to comply with sections 17 and 17.1 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 THE CENTRAL Part 1: Corporate Governance