Basel II Pillar 3 Disclosures

Last updated: May 2013

Disclosure 1: Related Party Policy
Disclosure 2: Regulatory Capital
Disclosure 3: Capital Adequacy
Disclosure 4: Credit
Disclosure 5: Liquidity
Disclosure 6: Operational Risk
Disclosure 7: Remuneration
Disclosure 8: Leverage Ratio


Disclosure 1: Related Party Policy

Introduction

Citizens Bank of Canada and its subsidiary Citizens Trust Company (collectively “Citizens”) has in place policies to identify, monitor and report on transactions with related parties in accordance with the Bank Act (BA) and the Trust and Loan Companies Act (TLCA).

Citizens must enter into transactions with related parties only as permitted by the legislation.

Related Party transactions are monitored to

  • fulfill regulatory requirements
  • prevent self dealing, and
  • the exercise of undue influence by related parties

Due diligence in the identification, monitoring and reporting of related parties transactions will serve to

  • protect member and organizational assets
  • protect reputational risk, and
  • provide transparency on reporting of related party transactions

Legislation

Part XI of the BA and TLCA define a related party which includes both individuals and legal entities. In addition to complying with the acts and this Policy, Citizens will ensure related parties are informed of their duties and have a clear understanding of their responsibilities on regulatory requirements pertaining to disclosure in conducting transactions or business with Citizens.

Related Party Summary of Definition under Part XI of the BA and TLCA

Individuals

If they hold positions of responsibility or otherwise have an ability to influence transactions to the advantage of themselves or another entity over those of Citizens.

Entity

If it is controlled by a person who is related party to Citizens within the meaning of the Citizens Related Party Definition

Related Parties

The following table outlines the Related Parties as defined by legislation and Citizens

Type Related Parties

Board of Director

All Board Members

Senior Officers

  • CEO, COO, President, Secretary, Treasurer, Controller, CFO, Chief Accountant, Chief Auditor or Actuary
  • An individual who performs the functions similar to those above
  • Head of a strategic planning unit
  • Head of the unit providing legal services or human resource services
  • Any other officer reporting directly to the Board, CEO, or COO.

Family Members

Spouses and children under the age of 18 years of Directors and/or Senior Officers.

Enterprises

Enterprises (including sole proprietorships, partnerships, corporations, and trusts) in which Directors/Senior Officers or their spouses or children under the age of 18 have a material, direct or indirect ownership, interest (≥ 50%).

Roles and accountabilities

This table outlines the roles and accountabilities within the Related Party Transactions Policy.

Role Accountability

Board of Directors

Delegates review and monitoring activities to the Risk & Conduct Review Committee.

Risk & Conduct Review Committee (RCRC)

  • Ensures organizational compliance to this policy.
  • Establishes management approval authority for permitted, nominal, or immaterial related party transactions as set out in OSFI Bulletin E-6.
  • Approving terms and conditions for permitted loans on preferred terms to related parties.
  • Reviews and approves related party transactions that exceed the authority limit for management.
  • Ensures transactions with related parties that may have a material effect on the stability or solvency of Citizens are identified.
  • Monitors the adherence to this policy.

Management

  • Ensures that staff correctly identify and report related party transactions and loans.
  • Considers for approval related party transactions that meet the criteria under this policy.
  • Conducts reviews of related party transactions.
  • Ensures that relevant and accurate reports are provided to the RCRC.
  • Audits related party transactions.

Corporate Secretary

  • Ensures there is sufficient governance for managing related party transactions and the reporting of related party transactions to the RCRC is timely.
  • Prepares a schedule of related parties annually and provides access to staff within Vancity and Citizens for monitoring, tracking and reporting purposes of related party transactions.
  • Facilitates the completion of the annual review of this Policy.

Chief Risk Officer (CRO)

  • Accountable for related party credit transactions.
  • Ensuring procedures and programs for their identification are in place.
  • Ensures integrity of reporting to RCRC.

Chief Financial Officer (CFO)

  • Accountable for the non-credit related party transactions.
  • Ensuring procedures and programs for their identification are in place.
  • Ensures integrity of reporting to RCRC.

Disclosure

All related parties are asked to file a Related Party Disclosure Statement that includes a listing of all personal and entity affiliations. They must also notify the Corporate Secretary within 30 days of any change to this information.

In addition, when transacting business with Citizens, related parties are required to disclose their related party status to staff.

Timelines

The CRO and the CFO will report to the RCRC on credit and non credit transactions with related parties respectively during the previous quarter and as required.

Borrowing and Issuance of Shares and Debt Obligations

The related party provisions of the Bank Act and the TLCA do not apply to the issue of shares of Citizens to a related party of Citizens if such shares are fully paid for in money. Citizens is permitted under the Bank Act and the TLCA to borrow money from or issue debt obligations to a related party. However, any such transactions must meet internal governance requirements of Citizens and the related party, and any applicable requirements of the Bank Act or the TLCA.

 

Disclosure 2: Regulatory Capital

Quantitative Disclosures

12/31/2014

12/31/2015

Modified Capital Disclosure Template

All-in

Transitional

All-in

Transitional

Common Equity Tier 1 Capital: instruments and reserves

       1

 Directly issued qualifying common share capital (and equivalent for non-joint stock companies) plus related stock surplus

         20,464,000.00

 

         20,464,000.00

 

       2

 Retained earnings

           4,028,000.00

 

           3,683,000.00

 

       3

 Accumulated other comprehensive income (and other reserves)

               (95,000.00)

 

               (98,000.00)

 

       4

 Directly issued capital subject to phase out from CET1 (only applicable to non-joint stock companies)

 

 

 

 

       5

 Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1)

 

 

 

 

       6

 Common Equity Tier 1 capital before regulatory adjustments

         24,397,000.00

 

         24,049,000.00

 

 Common Equity Tier 1 capital: regulatory adjustments

    28

 Total regulatory adjustments to Common Equity Tier 1

            (826,000.00)

 

            (953,000.00)

 

    29

 Common Equity Tier 1 capital (CET1)

         23,571,000.00

         24,380,000.00

         23,096,000.00

         23,757,000.00

 Additional Tier 1 capital: instruments

    30

 Directly issued qualifying Additional Tier 1 instruments plus related surplus

 

 

 

 

    31

      of which: classified as equity               under applicable accounting                standards

 

 

 

 

    32

      of which: classified as liabilities        under applicable accounting                standards

 

 

 

 

    33

 Directly issued capital instruments subject to phase out from additional Tier 1

 

 

 

 

    34

 Additional Tier 1 instruments (CET1 instruments not included in row 5) issued by subsidiaries and held by third parties (amount allowed in group AT1)

 

 

 

 

    35

     of which: instruments issued by          subsidiaries subject to phase out

 

 

 

 

    36

 Additional Tier 1 capital before regulatory adjustments

 

 

 

 

 Additional Tier 1 capital: regulatory adjustments

    43

 Total regulatory adjustments to Additional Tier 1 capital

 

 

 

 

    44

 Additional Tier 1 capital (AT1)

 

 

 

 

    45

 Tier 1 Capital (T1 = CET1 + AT1)

         23,571,000.00

         24,380,000.00

         23,096,000.00

         23,757,000.00

 Tier 2 capital: instruments and allowances

    46

 Directly issued qualifying Tier 2 instruments plus related stock surplus

 

 

 

 

    47

 Directly issued capital instruments subject to phase out from Tier 2

 

 

 

 

    48

 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or 34 ) issued by subsidiaries and held by third parties (amount allowed in group Tier 2)

 

 

 

 

    49

       of which: instruments issued by          subsidiaries subject to phase out

 

 

 

 

    50

 Collective allowances

 

 

 

 

    51

 Tier 2 capital before regulatory adjustments

 

 

 

 

 Tier 2 Capital: regulatory adjustments

    57

 Total Regulatory adjustments to Tier 2 capital

 

 

 

 

    58

 Tier 2 capital (T2)

 

 

 

 

    59

 Total capital (TC = T1 + T2)

         23,571,000.00

         24,380,000.00

         23,096,000.00

         23,757,000.00

 60*

 Total risk-weighted assets

         65,541,000.00

         66,403,000.00

         65,768,000.00

         66,671,000.00

 Capital ratios

    61

 Common Equity Tier 1 (as percentage of risk-weighted assets)

                         35.96

                         36.72

                         35.12

                         35.63

    62

 Tier 1 (as percentage of risk-weighted assets)

                         35.96

                         36.72

                         35.12

                         35.63

    63

 Total capital (as percentage of risk weighted assets)

                         35.96

                         36.72

                         35.12

                         35.63

 OSFI all-in target

    69

 Common Equity Tier 1 capital all-in target ratio

                            7.00

 

                            7.00

 

    70

 Tier 1 capital all-in target

                            8.50

 

                            8.50

 

    71

 Total capital all-in target ratio

                         10.50

 

                         10.50

 

* Citizens Bank is using option #2 under OSFI's CAR guideline for CVA capital charge phase-in.

 

Disclosure 3: Capital Adequacy

CB’s internal capital adequacy assessment process (ICAAP) requires CB to formulate and execute its strategic objectives within the organization’s risk philosophy and appetite. The primary purpose of Citizens’ Risk Appetite statement is to provide a high level overview of its tolerance for risk in pursuit of its mission and strategic goals. Citizens Bank formulates and executes on its strategic objectives within the organization’s risk philosophy and appetite.

Citizens Bank’s risk appetite statement is as follows:

Qualitative statements

  • We make the following commitments in order to live our purpose and values in how we do business. Our aim is to strengthen Citizens’ long-term business while contributing to the well-being of our customers, staff, communities and the environment;
  • We will be responsible and effective financial managers so Citizens remains strong and prospers;
  • We will provide our customers with outstanding service and advice, and help them achieve their financial goals;
  • We will ensure that Citizens is a great place to work;
  • We will lead by example and use our resources and expertise to effect positive change in our communities; and
  • We will be accountable for living up to our commitments.

Quantitative statements

  • Maintain a capital position that meets or exceeds tolerances required to enable Citizens’ vision and meet regulatory requirements;
  • Adhere to OSFI and internal management limits for Capital Adequacy Ratios, and Leverage Ratio.

Management takes the risk appetite statement and establishes risk limits and tolerances for approved business strategies, taking into account risk measures and monitoring activities that are defined within Board and Management Policies. In addition to setting limits, these policies detail responsibilities of the Board of Directors and Management.

The Board of Directors reviews and approves the Bank’s budget and capital plan annually, or more often, as necessary with the President/CEO responsible for protecting the Bank’s long term capital adequacy. The CFO is charged with monitoring and reporting the Bank’s capital position on an ongoing basis to ensure compliance.

As part of the ICAAP process, multiple stress tests using Economic capital modeling are integrated into the capital planning process to determine capital requirements. Stress testing can be defined as "the examination of the potential effects on a firm’s financial condition of a set of specified changes in risk factors, corresponding to exceptional but plausible events" and looks at what might happen when the assumptions underlying established models break down. Stress testing must identify possible events or future changes in economic conditions that could have unfavourable effects on the Bank’s exposures and assess the Bank’s ability to withstand such changes. As a result of stress testing, management is informed about potential risks and their impact and considers these risks in capital planning and risk management practices.

Citizens Bank has rigorous risk management processes to help mitigate the risks it faces and avoid future negative economic events. With acceptable risk levels quantified in the risk management policies, oversight committees like the Asset and Liability Committee and the Risk and Conduct Review Committee are in a strong position to monitor the risk Citizens has undertaken.

A summary of CB’s ICAAP is submitted annually to OSFI for review and is periodically audited by CB’s internal audit team.

Quantitative Disclosures

CB’s capital, risk weighted assets, and capital adequacy ratios are published by OSFI and are available through the following hyperlink:
Financial Data - Banks

 

Disclosure 4: Credit

Credit risk management

Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial transaction fails to meet its contractual obligations. Credit risk arises primarily from the Bank’s business activities from foreign exchange, credit and prepaid cards, and commercial lending syndication. The Bank is also exposed to other credit risks arising from investments in debt securities and other exposures arising from its investment activities (‘investment exposures’), including non-equity investment portfolio assets, derivatives and settlement balances with market counterparties.

The Bank manages, limits and controls concentrations of credit risk, where identified, to individual counterparties and industries. The Board, through the Credit Committee, places limits on the amount of credit risk accepted in relation to one customer and/or sector.

Accounting treatment for Impaired Assets

For the purposes of an individual evaluation of impairment, the amount of the impairment loss on a fixed rate financial instrument is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statement of operations. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purposes of a collective evaluation of impairment, financial assets are categorized on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the counterparties’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group, taking into account cure rates, work out costs, and discount factors.

CB adjusts its collective allowance methodology on an ongoing basis, taking into account factors such as historical loss experience and adjusting for current observable data that did not impact the period which the historical loss experience was based on. Estimates of changes in future cash flows for groups of assets reflects and is directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, real estate prices, payment status, or other factors indicative of changes in the probability of losses by CB and their magnitude).

The methodology and assumptions used for estimating future cash flows are reviewed regularly by CB to reduce any differences between loss estimates and actual loss experience. When a loan is uncollectible, it is written off after all the necessary procedures have been completed and the amount of the loss has been determined. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the consolidated statement of operations in loan impairment expense.

Accounting Treatment Securitized Loans

Currently the Bank does not have any securitized loans. The bank does however have accounting policies in place should securitization be required.

Financial assets are derecognized when the contractual rights to receive the cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred. If the Bank has neither transferred nor retained substantially all the risks and rewards of the transferred financial asset, it assesses whether it has retained control over the transferred asset. If control has been retained, the Bank recognizes the transferred asset to the extent of its continuing involvement. If control has not been retained, the Bank derecognizes the transferred asset.

The Bank periodically transfers loans to Special Purpose Entities (“SPEs”) through securitizations or through transfers to other independent third parties. In instances where the Bank’s securitizations and other transfers of receivables do not result in a transfer of contractual cash flows of the receivables or an assumption of an obligation to pay the cash flows of the receivable to a transferee, the Bank has not derecognized the transferred receivables and has instead recorded a secured borrowing with respect to any consideration received.

Quantitative Credit Disclosures

A breakdown of CB’s loan portfolio by loan type, its credit risk weighted assets, and impaired loans are published by OSFI and are available through the following hyperlink:
Financial Data - Banks

 

Disclosure 5: Liquidity

Liquidity risk describes the risk that the Bank will not be able to meet its current and future cash flow and collateral needs, both expected and unexpected, without materially affecting daily operations or our overall financial condition. Liquidity risk is inherent in any financial institution and could result from entity level circumstances and/or market events.

Accordingly, the Bank has policies and procedures in place to manage its liquidity position, both to comply with regulatory requirements and adhere to sound business practices.

(i) Liquidity risk management:

The Bank’s liquidity risk is subject to extensive risk management controls and is managed within the framework, policies and limits approved by the Board. On an annual basis, the Board, through the Audit Committee, reviews and approves the liquidity policy presented by management to ensure adherence to regulatory requirements. The Asset Liability Committee (“ALCO”) oversees the operational adherence to the liquidity policy. ALCO approves liquidity management processes and strategies presented by treasury and finance management in addition to overseeing adherence to minimum liquidity limits, eligibility requirements for liquid assets, investments with counterparties, funding diversification, deposit concentration and diversification limits.

Stress testing on liquidity is conducted annually as part of its risk oversight and the results would be used to inform and ensure adequate liquidity risk limits are in place and current.

Contingency plans exist for liquidity to satisfy funding requirements in the case of a general market disruption or adverse economic conditions. Proper execution of the contingency plan is the responsibility of the treasury department. The liquidity contingency plan outlines the appropriate steps to follow and stakeholders to notify. It is scenario tested annually, and the results are presented to the Board.

(ii) Liquidity risk exposure:

The key measure used by the Bank for managing liquidity risk is the ratio of liquid assets to total assets. For the purpose of measuring liquidity risk, liquid assets may comprise the total market value of cash, Government of Canada or provincial treasury bills, debt securities with a government guarantee and a minimum DBRS Limited (“DBRS”) investment rating of A, government guaranteed mortgage backed securities, banker’s acceptances and bearer deposit notes from Schedule I and II banks with a DBRS rating of R-1 low or higher, and corporate commercial paper with a DBRS rating of R-1 low or higher.

 

Disclosure 6: Operational Risk

Operational Risk Disclosure:

Operational risk is the combination of three principle risks: Business Risk, Talent Risk, and Technology Risk.

Business Risk refers to the level of risk inherent in the way we do business.  Innovation that creates community impact requires that the Bank be able to quickly translate cooperative member and community insights into opportunities that will meet the needs of the real economy. This requires the ability to be flexible, to test and learn, and adapt what the Bank is doing as it gains further insight into the drivers of banking services aligned to real economic issues, with appropriate controls.

Talent Risk describes the risk that the Bank will not have the right people in place at the right time to achieve our objectives.  Our people play the biggest role in our transformation and day-to-day operations.  We have a transformational vision for the Bank that invites transformational leadership that is also able to execute strategies and achieve results.

Technology Risk describes the risk that the Bank will not have the technology infrastructure required to deliver a differentiated experience for its customers and for its single shareholder cooperative members. While the Bank does not lead with technology, without an integrated technology platform the Bank cannot release the full capability and capacity of the organization to achieve impact at scale.

The primary responsibility for the development and implementation of controls to address operational risk is assigned to the senior executive management team of the Bank with clear lines of operating with each business unit.  This operating responsibility of the Bank is supported by the development of explicit risk policies and procedures for the management of operational risk in the following areas:

  • Execution, delivery and process management
  • Employee practices and workplace safety
  • Internal and external fraud
  • Member products and business practices
  • Damages to physical assets
  • Business disruptions and systems failure

The Bank benefits from the scale and expertise of its single shareholder, Vancity Credit Union through market based service level agreements (in accordance with Bank outsourcing policies), which enable the Bank to manage these operational risks at sufficient scale and sophistication.

Compliance with the Bank’s policies and procedures is supported by a program of periodic reviews undertaken by Internal Audit.  The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to senior management and the Audit Committee of the board of directors of the Bank.

The Operational Risk Management Policy is reviewed periodically by the Chief Risk Officer. The results of these reviews are discussed with management, with summaries submitted to senior management and the Risk and Conduct Review Committee of the board of directors of the Bank.

Citizens Bank uses the basic indicator approach for operational risk, which is based on the gross income of the most recent 3 years.  Operational Risk is part of the formula for the Risk Based Capital Ratio.

 

Disclosure 7: Remuneration

Citizen’s Bank of Canada (“CB”) works closely with its Governance & Executive Compensation Committee (“GECC”) to develop and maintain appropriate governance and decision making related to CB’s executive total rewards practices. GECC meets on a quarterly basis. Vancity retains an independent compensation expert to provide advice on the various elements of total rewards programs, including that of CB, where necessary.

The policy and competitiveness of total reward programs are reviewed annually to ensure changing market conditions are considered and that CB has the ability to attract and retain employees needed to deliver on its business objectives. Total rewards program positioning is market competitive when target level performance results are achieved and could increase when stretch targets are achieved. The market for assessing competitiveness is a blend of credit unions, banks, and other local employers with which CB competes for talent.

CB endeavours to ensure that its remuneration policy is consistent with its business model. The senior management team’s total rewards package consists of base salary and an annual incentive plan aligned with organizational objectives. Performance measurements used to calculate variable remuneration are adjusted to take into account current or potential risks to the company.

During 2015, the total amount of fixed and variable remuneration for key management and risk-takers was $989,378. We do not break down the total between key management and other risk takers as all employees who hold material risk positions are considered to be in key management roles.Annex

The following table shows a breakdown of fixed and variable remuneration for senior management and other material risk takers.

Table A

Total value of unrestricted remuneration awards*

2014

2015

 

Fixed remuneration

 

 

  • Cash-based

$600,258

$751,246

  • Share and share-linked instruments

n/a

n/a

  • Other

n/a

n/a

 

Variable remuneration

 

 

  • Cash-based

$194,746

$238,132

  • Shares and share-linked instruments

n/a

n/a

  • Other

n/a

n/a

*Citizens Bank does not provide deferred remuneration to key management and risk-takers

 

Disclosure 8: Leverage Ratio

Quantitative Disclosures

 

 Item

 Leverage Ratio Framework

 On-balance sheet exposures

   1.00

 On-balance sheet items (excluding derivatives, SFTs and grandfathered securitization exposures but including collateral)

              110,524.00

   2.00

 (Asset amounts deducted in determining Basel III “all-in” Tier 1 capital)

-                  953.00

   3.00

 Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of lines 1 and 2)

              109,571.00

 Derivative exposures

   4.00

 Replacement cost associated with all derivative transactions (i.e. net of eligible cash variation margin)

                 3,363.00

   5.00

 Add-on amounts for PFE associated with all derivative transactions

                 1,710.71

   6.00

 Gross up for derivatives collateral provided where deducted from the balance sheet assets pursuant to the operative accounting framework

 

   7.00

 (Deductions of receivables assets for cash variation margin provided in derivative transactions)

 

   8.00

 (Exempted CCP-leg of client cleared trade exposures)

 

   9.00

 Adjusted effective notional amount of written credit derivatives

 

 10.00

 (Adjusted effective notional offsets and add-on deductions for written credit derivatives)

 

 11.00

 Total derivative exposures (sum of lines 4 to 10)

                 5,073.71

 Securities financing transaction exposures

 12.00

 Gross SFT assets recognised for accounting purposes (with no recognition of netting), after adjusting for sale accounting transactions

 

 13.00

 (Netted amounts of cash payables and cash receivables of gross SFT assets)

 

 14.00

 Counterparty credit risk (CCR) exposure for SFTs

 

 15.00

 Agent transaction exposures

 

 16.00

 Total securities financing transaction exposures (sum of lines 12 to 15)

 

 Other off-balance sheet exposures

 17.00

 Off-balance sheet exposure at gross notional amount

               38,617.00

 18.00

 (Adjustments for conversion to credit equivalent amounts)

-              34,655.30

 19.00

 Off-balance sheet items (sum of lines 17 and 18)

                 3,961.70

 Capital and Total Exposures

 20.00

 Tier 1 capital

               23,096.00

 21.00

 Total Exposures (sum of lines 3, 11, 16 and 19)

              118,606.41

Leverage Ratios

22

Basel III leverage ratio

                  19.47