Credit risk in lending is the risk of financial loss resulting from the failure of a borrower to fully honour their financial or contractual obligations, such as failure to repay principal and interest on their loan. The Company manages this risk through the diligent application of prudent lending limits and practices which reflect the Company’s risk neutral appetite, with focus on building a high quality credit portfolio over loan growth. As part of managing that risk, the Company maintains a diversified book of lending, with portfolio diversity geographically, in industry and borrowers.
The Company employs a risk measurement process for its loan portfolio. Credit risk rating matrixes are established for each lending product to assess and quantify credit risk in an accurate and consistent manner. Areas of credit risk assessment are proactively updated to reflect macroeconomics, emerging risks such as climate change and environmental risks, real estate values, and appropriate stress testing to identify potential impacts to the credit risk profile.
The assessment of individual loans and mortgage credit risk is managed as a dynamic process throughout the life of the credit. The Company assigns a numeric risk rating to each loan, mortgage, and line of credit by performing a thorough risk analysis at the time of loan origination, renewal, and annual review.
Credit risk is measured by reviewing exposure to borrowers, whether individuals (consumer loans), First Nations, or commercial entities, and by reviewing qualitative and quantitative factors that impact the loan portfolio. A Residential Mortgage Underwriting Policy has been established within the Board of Directors - Credit Policy to manage credit risks in this portion of the loan portfolio. The Company has developed a framework that promotes proactive management of credit risks through multiple lines of monthly reporting that assess the effectiveness of current processes and controls.
Loan exposures are managed and monitored through facility limits for individual borrowers and a credit review process. These reviews ensure that the borrower complies with internal policy and underwriting standards. The Company relies on collateral security, typically in the form of a fixed and floating charge over the assets of its borrowers. Credit risk is also managed through regular analysis of the ability of customers to meet interest and capital repayment obligations and by changing lending limits where appropriate.
Each Regional Office is responsible for the day-to-day management of their respective loan portfolios and is considered a first line of defense in managing credit risk. The second line of defense is the Corporate Credit department along with Senior Management who review the portfolio risk on at least a monthly basis, providing direction where required in account management. Senior Management, including the Chief Executive Officer and Vice-President, Credit, are responsible for the oversight and implementation of credit risk policies and for monitoring compliance.
The Board of Directors delegates to the Loans Committee full power as it relates to all credit related matters. The Loans Committee has ultimate oversight responsibility for understanding the nature and level of credit risk of the Company, ensuring Senior Management has implemented a risk management program commensurate with the Company’s risk appetite, policies, procedures, and controls.
The Loans Committee is responsible for establishing credit approval authorities of the Chief Executive Officer, establish exposure limits and review lending practices of the Company as recommended by Senior Management. The Loans Committee meets at least quarterly and reports to the Directors of the Company on all matters reviewed by the Committee.
Annual self-assessments and attestations as to credit risk management and compliance points of reliance, including disclosure of any gaps be it internal, Board policies, or regulatory are fully disclosed including plans to satisfy any gaps. The Chief Risk Officer, Chief Compliance Officer, and Chief Executive Officer, along with the full Board, are updated and any outstanding items are monitored through quarterly Committee (Loans, Audit, Risk) reports.
As a final line of defense, Internal Audit oversees an ongoing review of assigned loan risk assessments and provide an objective review of credit’s compliance with the Company’s credit risk management practices and processes, reporting their findings to both Senior Management and the Board of Directors Audit Committee.