In this issue:
The OSFI Pillar is published by the Communications Division of the Office of the Superintendent of Financial Institutions Canada.
For more information on the articles in this issue, or to provide feedback, please e-mail OSFI Communications at: communications@osfi-bsif.gc.ca.
To subscribe to the OSFI Pillar, click here.
Proactive DisclosureOn April 2, 2014, Superintendent Julie Dickson spoke on the lessons learned from the global financial crisis and the challenge of adjusting to changing times. Below is an excerpt from her speech:
Let me begin by congratulating the Canadian Reinsurance Conference on its 58th anniversary. Today, this conference is one of the premier events of its kind. I like the theme you have chosen for this year: Reflect. Rewire. Resurge. The words can be interpreted in different ways (like art), which is probably why they were chosen – it is always useful to have some debate! As a supervisor, what came to my mind was timing and whether the words implied that the crisis is over and we are back to normal and ready to resurge.
In reality, the current environment is far from normal. While we appear to be at the start of a normalization process, interest rates are still at historically low levels, the Federal Reserve must deal with its $4 trillion balance sheet and unwind Quantitative Easing (a few other central banks have similar challenges), growth in several advanced economies is still not at pre-crisis levels and, while the base case is for improvement, tail risks remain.
That being said, a whole lot of reflection has been going on regarding the global financial crisis, the huge impact it has had on global growth, whether we have re-wired enough in response, or too much, and lastly whether we are ready to resurge.
As you know, Canada fared better than many other countries in the crisis. As we at OSFI reflect on that, we continue to say that past success does not guarantee future success. OSFI and Canadian banks and insurance companies need to avoid complacency. We were recently subject to an IMF financial sector assessment (i.e. FSAP). The FSAP process determines a country’s compliance with international standards and provides an overview of the economic health of a country as well as regulatory effectiveness. The assessors were asked to look for any signs of complacency at OSFI. I am happy to say that they did not find any. They have concluded that we continue to be effective with a high level of compliance with international standards. The FSAP report commented on some of the factors that helped Canada withstand the crisis well, including OSFI’s close touch supervision, our clear and straightforward mandate, and our ability to attract and retain financial sector specialists. The FSAP team also noted that stress tests recently conducted show that major financial institutions would continue to be resilient to credit, liquidity, and contagion risks arising from a severe stress scenario.
I think it is very important, however, not to rest on laurels because the bar is constantly rising. So, we continue to seek information on what others are doing and how we compare. OSFI tends to strongly support global standards and practices, versus entering into endless debates about whether we need them.
While consulting and ensuring we understand impacts is important, we need to keep an eye on endless debate. In this regard, I was very happy to see the December 2013 report of the U.S. Department of Treasury, on modernizing insurance regulation. It did not mince words in advocating group capital adequacy and consolidated supervision in the U.S., something that has been debated for a long, long time. The International Association of Insurance Supervisors (IAIS) is also on the verge of ending this debate.
In the area of standards, OSFI is often asked whether our goal is always to have the highest standards or the toughest rules in the world.
Let me be clear: OSFI’s approach is to look at international standards (which, remember, are minimums) and ask whether, in our judgment, they are sufficiently conservative. Sometimes we think they are, sometimes we do not. Prior to the financial crisis, for example, we looked at international minimum capital rules for banks and expressed our view that they were not high enough - and so we set our standards above them. This turned out to be an important decision and is one reason why the Canadian system held up well.
We do not automatically set higher standards than what are agreed upon internationally. We are not ideological when it comes to regulation. Our philosophy is to look at the international standards, and then make up our own mind about whether they are appropriate or need to be strengthened in Canada.
Click here to read the full transcript.
On April 24, 2014, Andrew Kriegler spoke to the C.D. Howe Institute on the importance of proportionality in OSFI’s approach to supervisory and regulatory work. Below is an excerpt from his speech.
I would like to speak to you today about the idea of proportionality; proportionality in the supervision of Canadian federally regulated financial institutions. In talking about that idea I will bring together three themes for you to consider; themes that Julie Dickson, Mark Zelmer and I have each spoken about in recent months; themes that together drive a lot of our thinking at OSFI on the future development of financial institution regulation and supervision in Canada.
The three themes are:
By “Supervisory proportionality for Canada,” I mean of course how and why we line up with international minimum standards – and with the decisions that some countries, including Canada, take from time to time to go beyond them. But let me first touch on the question of international standards themselves.
OSFI strongly supports the development of international standards and the practices to go with them. OSFI has had a long history of participation at the international level on issues that matter for Canadian institutions, including instrumental work in drafting of Basel II and III. We continue to be active participants in development of international norms at organizations ranging from the Financial Stability Board to the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors, among others. This participation has led to OSFI chairing groups that developed many important standards, from the principles on the management of operational risk to the work being done on risk culture and risk appetite.
This level of participation and the resource commitment that goes with it might seem out of proportion – at least when measured by the size of our financial system compared to its global peers. Yet our major banks and insurance companies are very active internationally and as a result are subject to rules of many other jurisdictions. That is precisely why our level of international participation is so important. It provides us a window on the thinking behind new international standards and the opportunity to inform their development with a Canadian perspective. That is important to the strength, resiliency and competitiveness of our financial system.
Click here to read the full text of Andrew’s speech.
Below is an excerpt of speaking points by Deputy Superintendent Mark Zelmer on the impact of regulatory reform on financial institutions of various sizes, made on April 3, 2014 to the C.D. Howe Institute in Toronto. The excerpt concerns the impact of regulatory reforms on smaller sized financial institutions:
A small bank advisor position has been created in OSFI to identify, validate and prioritize concerns of small and medium-sized deposit-taking institutions:
The new entry process for banks and insurance companies is under review with an eye towards looking for ways to streamline the process.
OSFI’s Guidance Review Committee considers the burden new guidelines could impose on regulated financial institutions as well as their ability to implement such expectations. This is especially true in the case of smaller- and medium-sized FRFIs that may have limited resources; and
OSFI supervisors are working with institutions of all sizes to tailor the application of guidance (e.g. B20, Corporate Governance, ORSA) to the actual size and complexity of each institution. This will be an evolutionary process.
But, at end of day, OSFI’s mandate requires us to focus on protecting depositors, policyholders and creditors, while having due regard to the need to allow institutions to compete effectively and take reasonable risks.
Key challenge for us is to implement our regulatory expectations in a way that is mindful of the competitive landscape and business models of regulated financial institutions of varying size.
This is where our discussions and consultation process with private stakeholders are very helpful in formulating regulatory guidance because they help us articulate our expectations in a way that is pragmatic and sensitive to the environment in which financial institutions operate.
Click here to read the full text of Mark’s speech.
Other speaking engagements in early 2014 included:
On April 14, 2014, OSFI issued for comment Draft Guideline B-21, Residential Mortgage Insurance Underwriting Practices and Procedures. The Draft Guideline sets out OSFI’s expectations with respect to prudent residential mortgage insurance underwriting and related activities.
Once finalized, the Guideline will be applicable to all federally-regulated mortgage insurers to which the Insurance Companies Act applies and that provide mortgage insurance for residential mortgage loans in Canada, and/or reinsurance for such insured loans.
Click here to read the draft guideline.
On April 1, 2014, OSFI released its Priorities for 2014-2017. The document provides an overview of our key initiatives for the next three years. A Superintendent Julie Dickson noted in her cover letter accompanying the release, “Our priorities remain the same as last year with the exception of one new priority, ‘Enhancing Supervisory Processes,’ which reflects an increased focus on this area.
“Using OSFI’s Priorities as our guide, I believe that we are well positioned to continue meeting the challenges posed by domestic and global events as well as international regulatory changes.”
Click here to read the full list of priorities.
The Hon. James M. Flaherty, Minister of Finance, tabled OSFI’s 2014-2015 Report on Plans and Priorities to the House of Commons on March 6, 2014.
In her letter introducing the RPP, Superintendent Julie Dickson wrote: “This report highlights OSFI’s priorities for the 2014-2015 fiscal year. Anticipating and responding to risks emanating from the economy and the financial system is a key priority of OSFI, given our mandate. Thus we will continue to focus on the global economy, and the impact of interest rate conditions on the risk profile of financial institutions and pension plans, and closely monitor household debt levels and real estate lending in Canada. Also responding to external risks, we will focus on assessing institutions’ operational risks, including those related to cyber security and outsourcing.”
Click here for OSFI’s 2014-2015 RPP table of contents.
The Office of the Chief Actuary (OCA) has released a study, “Mortality Projections for Social Security Programs in Canada: Actuarial Study No. 12” that provides mortality estimates for beneficiaries of the Canada Pension Plan (CPP) and Old Age Security (OAS) program, benefit programs which cover the majority of the Canadian population.
Click here to read the study.
On March 31, 2014, OSFI issued an advisory to assist affected banks with the implementation in Canada of the public disclosure requirements outlined in the Basel Committee on Banking Supervision’s document entitled Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement.
Click here for the advisory.
On March 31, 2014, OSFI posted an updated version of the Own Risk Solvency Assessment (ORSA) reporting form for 2014 and related instructions. The revised version included only the KMR form and instructions.
Click here for related documents.
The Office of the Chief Actuary (OCA) tabled its “Actuarial Report on the Pension Plan for Federally Appointed Judges as at March 31, 2013” before Parliament on March 27, 2014.
Click here to read the report.
On March 13, 2014, OSFI issued an Instruction Guide to inform the pension industry of our current filing and reporting requirements for actuarial reports for defined benefit plans filed pursuant to subsection 12(2) of the Pension Benefits Standards Act, 1985 (PBSA).
Click here to read the guide.
On March 10, 2014, OSFI issued a letter reminding companies that have earthquake exposure in British Columbia and Québec that they are required to submit one copy of the Earthquake Exposure Data form to OSFI by April 15, 2014.
Click here for related documents.
On February 25, 2014, OSFI issued guidance regarding the early adoption of the own credit risk component of IFRS 9 – General Hedging and Own Credit Risk.
Click here to read the letter.
On February 5, 2014, OSFI issued a letter to gather information that OSFI uses in calculating the Estimated Solvency Ratio (ESR) for a pension plan and supervisory monitoring of contribution holidays.
Click here for related documents.
The OSFI Pillar is published by the Communications Division of the Office of the Superintendent of Financial Institutions Canada.
For more information on the articles in this issue, or to provide feedback, please e-mail OSFI Communications at: communications@osfi-bsif.gc.ca.
To subscribe to the OSFI Pillar, click here.