CIA Annual Meeting Assemblée annuelle de l’ICA June 29 & 30, 2006  Les 29 et 30 juin 2006 Ottawa, Ontario D.J. Oakden Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Valuation of Assets –Held to Maturity Amortized value  Unrealized gains/losses not shown –Held for Trading Market value  Unrealized gains/losses included in income –Available for Trading Market Value  Unrealized gains/losses included in other comprehensive income –Fair Value Option Market Value  Unrealized gains/losses included in income Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Considerations for the Valuation of Assets –Held to Maturity Significant penalty if any assets are sold  Penalty will discourage use of this class –Held for Trading Must be actively traded  Most assets will not qualify –Available for Trading All other assets  Easiest class to use –Fair Value Option Must demonstrate reduction in risk/mismatch  Requires a lot of work but is worth the effort Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Valuation of Liabilities –Selection of Interest Rate HFT, AFS or FVO  Basically current market rate Held to Maturity  Book yield Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Income Statement Presentation For assets classified as available for sale changes in interest rates will result in unrealized capital gains which will be shown as other comprehensive income while changes in claims liabilities will go through the income statement. Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Fair Value Option The Fair Value Option Can Only Be Used If It –Eliminates or significantly reduces mismatch Determined by institution subject to audit –Risk management policy Involving Financial Assets/Liabilities Reviewed by key management personnel Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Basel Committee on Banking Supervision Principles 1.Meet IAS 39 in form and substance 2.Have Risk Management Systems in place prior to implementation 3.Must be able to reliably estimate fair values 4.Provide supplemental information to Supervisors to assist in assessing utilization of fair value option Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Basel Committee on Banking Supervision Principles 5. Supervisors should evaluate a bank’s risk management and control practices as they pertain to the use of the FVO 6. Supervisors should consider risk management and control practices related to the use of the FVO when assessing capital adequacy 7. Regulatory capital should be adjusted for gains and losses from changes in own credit risk as a result of applying the fair value option to financial liabilities Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Timing of Changes –2007 Financial Reporting –Assets must be designated by Jan. 1, 2007 –Risk Management Policy must be in place –Approved by the Board? Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Significantly Reduce –What does it mean? Determined by each financial institution  Internal Audit Review  External Audit Review Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Significantly Reduce –What does it mean? It does not require cash flow matching Duration matching is likely sufficient  Requires frequent review  Monthly  Quarterly  Requires management/Board review Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Policy to Reduce Mismatch –Target Duration Tolerance –Projected Assets Updated and projected regularly  Quarterly  Monthly –Reporting Management Board Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Failure to Act If assets are classified as AFS then you may have –Volatility in the Income Statement –Qualified Opinion? Session PC-4 Impact on Discounting

CIA Annual Meeting  Assemblée annuelle de l’ICA Questions/Comments Session PC-4 Impact on Discounting