As a wholly-owned subsidiary of Vancity Credit Union , our annual reports are rolled up into the corporate reporting of our parent company.
Learn more about Vancity, its performance, and where Vancity Community Investment Bank fits in to the bigger picture, through the annual reports on the Vancity website.
Basel II Pillar 3 Disclosure
1: Related party policy
Vancity Community Investment Bank (VCIB) and its subsidiary Citizens Trust Company (collectively “VCIB”) 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).
VCIB 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
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, VCIB 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 VCIB.
|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 VCIB.|
|Entity||If it is controlled by a person who is related party to VCIB within the meaning of the VCIB Related Party Definition|
The following table outlines the Related Parties as defined by legislation and VCIB.
|Board of Director||All Board Members|
|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.
|Board of Directors||Delegates review and monitoring activities to the Risk & Conduct Review Committee.|
|Risk & Conduct Review Committee (RCRC)||
|Chief Risk Officer (CRO)||
|Chief Financial Officer (CFO)||
|VP, People Solutions||
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 VCIB, related parties are required to disclose their related party status to staff.
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 VCIB to a related party of VCIB if such shares are fully paid for in money. VCIB 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 VCIB and the related party, and any applicable requirements of the Bank Act or the TLCA.
2: Regulatory capital
|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||20,464,000|
|3||Accumulated other comprehensive income (and other reserves)||(302,000)||(529,000)|
|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||27,011,000||32,163,000|
|Common Equity Tier 1 capital: regulatory adjustments|
|28||Total regulatory adjustments to Common Equity Tier 1||(318,000)||(337,000)|
|29||Common Equity Tier 1 capital (CET1)||26,693,000||26,941,000||31,826,000||31,999,000|
|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)||26,693,000||26,941,000||31,826,000||31,999,000|
|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|
|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)||26,693,000||26,941,000||31,826,000||31,999,000|
|60*||Total risk-weighted assets||70,910,000||71,123,000||76,697,000||76,827,000|
|61||Common Equity Tier 1 (as percentage of risk-weighted assets)||37.64||37.88||41.50||41.65|
|62||Tier 1 (as percentage of risk-weighted assets)||37.64||37.88||41.50||41.65|
|63||Total capital (as percentage of risk weighted assets)||37.64||37.88||41.50||41.65|
|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|
|* VCIB is using option #2 under OSFI’s CAR guideline for CVA capital charge phase-in.|
3: Capital adequacy
VCIB’s internal capital adequacy assessment process (ICAAP) requires VCIB to formulate and execute its strategic objectives within the organization’s risk philosophy and appetite. The primary purpose of VCIB’s risk appetite statement is to provide a high level overview of its tolerance for risk in pursuit of its mission and strategic goals. VCIB formulates and executes on its strategic objectives within the organization’s risk philosophy and appetite.
VCIB’s capital risk appetite statement is as follows:
Capital risk is the risk of inadequate or outside of the required range of capital to support the strategy of the organization. Citizens Bank stays within our current internal capital adequacy ratio (CAR) target of 25%. As the organization grows, and if our capital is limited, we will focus on high impact and high return activities that align with our strategic goals. In addition,
- We conduct financial assessments to understand how much capital is required for each risk dimension. In addition, we conduct stress testing for various external changes (e.g., severe economic downturn)
- We have accurate forecasts to create mitigation plans in accordance with our strategy to ensure we stay above our internal capital target
- We have a detailed operational methodology to implement our strategic response to changes in capital, in a timely way
With a low risk appetite for capital risk, the ICAAP process is imperative for the Bank to set internal capital targets to ensure the soundness of the Bank
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 VCIB’s budget and capital plan annually, or more often, as necessary with the President/CEO responsible for protecting the VCIB’s long term capital adequacy. The CFO is charged with monitoring and reporting the VCIB’s capital position on an ongoing basis to ensure compliance.
As part of the ICAAP process, multiple stress tests including 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 VCIB’s exposures and assess VCIB’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.
VCIB has a maturing risk management program to help mitigate known risks and avoid future negative economic events (i.e. risk management policies that quantify risk tolerance via limits). Oversight committees like the Asset/Liability Committee and Risk Management Committee are in a strong position to monitor operations utilizing various policies and frameworks. A summary of VCIB’s ICAAP is submitted as required to OSFI for review and is periodically audited by VCIB’s internal audit team.
VCIB’s capital, risk weighted assets, and capital adequacy ratios are published by OSFI and are available through the following hyperlink:
Financial Data – Banks
Credit risk management
Credit risk is the risk of financial loss to VCIB if a customer or counterparty to a financial transaction fails to meet its contractual obligations. Credit risk arises primarily from the VCIB’s business activities from foreign exchange, credit and prepaid cards, and commercial lending. . VCIB 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.
VCIB manages, limits and controls concentrations of credit risk, where identified, to individual counterparties and industries. The Board, through the Risk and Conduct Review Committee, places limits on the amount of credit risk accepted in relation to one customer and/or sector.
Impairment of financial assets
VCIB assesses, at each reporting date, whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are recorded only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and the event(s) has (have) an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
Objective evidence that financial assets are impaired can include significant difficulty of the borrower or issuer, default or delinquency by a borrower, restructuring of a loan or advance by VCIB on non-market terms that VCIB would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as conditions that correlate with defaults in the group.
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 future cash flows discounted at the financial asset’s original effective interest rate. That 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 income. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the effective interest rate determined under the contract. The calculation of the present value of 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.
On an ongoing basis, VCIB adjust the inputs on its collective allowance, 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 VCIB and their magnitude).
The methodology and assumptions used for estimating future cash flows are reviewed regularly by VCIB to reduce any differences between loss estimates and actual loss experience. When a loan is uncollectable, it is written off after all the necessary procedures have been completed and the amount of the actual 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 income in loan impairment (recovery) expense.
At December 31, 2017, a new accounting standard (IFRS 9) had been issued for impairment of financial instruments by the IASB but not yet effective for VCIB’s December 31, 2017 consolidated financial statements. A summary of the new standards for loan impairment will follow below:
IFRS 9 replaces the incurred loss model in IAS 39 with a forward looking expected credit loss (ECL) model. The new ECL model will result in an allowance for credit losses being recorded on financial assets regardless of whether there has been an actual loss event. This differs form the current approach where the allowance recorded on performing loans is designed to capture only losses that have been incurred whether or not they have been specifically identified. The most significant impact will be on the loan portfolio.
The ECL model contains a three stage approach which is based on the change in credit quality of financial assets since initial recognition. In assessing whether credit risk has increased significantly, entities are required to compare the risk of a default occurring on the financial instrument as at the date of initial recognition.
Accounting treatment securitized loans
Currently VCIB does not have any securitized loans. VCIB 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 VCIB 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, VCIB recognizes the transferred asset to the extent of its continuing involvement. If control has not been retained, VCIB derecognizes the transferred asset.
Quantitative credit disclosures
A breakdown of VCIB’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
Liquidity risk describes the risk that VCIB will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset as well as not being able to meet unexpected cash needs. Liquidity risk is inherent in any financial institution and could result from entity level circumstances and/or market events.
Accordingly, VCIB 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:
VCIB’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 VCIB 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.
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 VCIB 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 VCIB 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 VCIB 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 VCIB that invites transformational leadership that is also able to execute strategies and achieve results.
Technology Risk describes the risk that VCIB will not have the technology infrastructure required to deliver a differentiated experience for its customers and for its single shareholder cooperative members. While VCIB does not lead with technology, without an integrated technology platform VCIB 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 VCIB with clear lines of operating with each business unit. This operating responsibility of VCIB is supported by the development of explicit risk policies and procedures for the management of operational risk.
VCIB benefits from the scale and expertise of its single shareholder, Vancity Credit Union through market based service level agreements (in accordance with VCIB outsourcing policies), which enable VCIB to manage these operational risks at sufficient scale and sophistication.
Compliance with VCIB’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 VCIB.
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 VCIB.
VCIB 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.
Oversight and governance of the remuneration policies and compensation structure for Vancity Community Investment Bank’s senior management is provided by the Governance & Executive Compensation Committee (“GECC”) of the Board. GECC meets on a quarterly basis.
VCIB is a subsidiary of Vancouver City Savings Credit Union (“Vancity”). Vancity retains an independent compensation expert to provide advice on the various elements of total rewards programs, including that of VCIB, where necessary.
The policy and competitiveness of total reward programs is reviewed annually to ensure changing market conditions are considered and that VCIB 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 VCIB competes for talent.
VCIB endeavors to ensure that the remuneration policy is consistent with the business model. The senior management team’s total rewards package consists of base salary and an annual variable 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 and is comprised of both individual and organizational performance objectives.
For 2017, the total amount of fixed and variable remuneration for 6 key management and risk-takers was $1,529,919. 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.
|Total value of unrestricted remuneration awards*||2016||2017|
*VCIB does not provide deferred remuneration to key management and risk-takers
8: Leverage ratio
|Item|| Leverage Ratio Framework (in $000’s)
|On-balance sheet exposures|
|1.00||On-balance sheet items (excluding derivatives, SFTs and grandfathered securitization exposures but including collateral)||113,141|
|2.00||(Asset amounts deducted in determining Basel III “all-in” Tier 1 capital)||-337|
|3.00||Total on-balance sheet exposures (excluding derivatives and SFTs) (sum of lines 1 and 2)||112,804|
|4.00||Replacement cost associated with all derivative transactions (i.e. net of eligible cash variation margin)||639|
|5.00||Add-on amounts for PFE associated with all derivative transactions||820|
|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)||1,459|
|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||35,792|
|18.00||(Adjustments for conversion to credit equivalent amounts)||-32,141|
|19.00||Off-balance sheet items (sum of lines 17 and 18)||3,651|
|Capital and Total Exposures|
|20.00||Tier 1 capital||31,826|
|21.00||Total Exposures (sum of lines 3, 11, 16 and 19)||117,914|
|22||Basel III leverage ratio||26.99|