Remarks by Superintendent Jeremy Rudin to the Economic Club of Canada, Toronto, September 30, 2014


A major strength of our approach is that it aims to ensure that regulatory compliance does not become a substitute for risk management. Indeed, financial institutions cannot comply with our expectations unless they actively measure and manage their own risks.

Getting the balance right: Challenges in maintaining financial stability

Let’s start by reminding ourselves why we are here today. Why has a bureaucrat from Ottawa come to speak in the heart of Canada’s financial services industry, and why have so many of you turned out to listen?

It is because, in Canada, the financial services industry and the public are partners. And my job, just like those of all of my colleagues at OSFI, is to look after the public’s interest in our partnership.

The origin of this partnership is easy to find.

When it comes to economic growth, financial services are essential services.

Among their many benefits, financial services link those who want to save with those who want to borrow and invest, and they link those who want to shed risk with those who are ready to bear more risk.

If the provision of these essential financial services were to come under stress and were threatened with disruption, the public, through its government, would be compelled to intervene.

The evidence of this is clearest in the countries that were hit hard by the recent financial crisis.
Conditions forced those countries to undertake extraordinary interventions to support their financial services industries and their major institutions.

How do we, at OSFI, look after the public’s interest in this partnership?

We do this largely by restraining risk-taking that would be excessive from the public’s point of view. Our actions help to prevent disruptions in the provision of financial services and to protect individuals and businesses who have entrusted funds to federal financial institutions. Moreover, we always aim to act well before a situation becomes dire.

This is easy to explain, but hard to do well. Like so many things in life, the key challenge is striking the right balance.

There are many dimensions to this problem. I will have time today to talk about three of them.

  • CHALLENGE ONE: how to restrain excessive risk-taking while encouraging responsible risk-taking.
  • CHALLENGE TWO: how best to apply international agreements on prudential standards, while respecting the particular needs and circumstances of Canada’s financial sector
  • CHALLENGE THREE: how to promote financial stability across the institutions under OSFI’s watch, when they vary greatly in their systemic importance and their capabilities.

We would be missing the point if we tried to stamp out risk-taking in general. We are in this partnership because efficient and effective financial services are essential for economic growth. And these essential services must involve risk-taking by the service provider.

So our first challenge is how to restrain excessive risk-taking while encouraging responsible risk-taking. At OSFI, we believe the best way to achieve this balance is:

  • first, to set expectations for financial institutions; we call this ‘issuing guidance’, and
  • second, to monitor closely how individual financial institutions adhere to our expectations; we call this ‘supervising’.

To the extent possible, we stay away from detailed, prescriptive rules. Rather, we prefer to rely on high-level, broadly stated principles.

To be sure, our guidance does include some ‘bright lines’ that institutions are not allowed to cross — clearly defined rules and requirements — but we try to keep those to a minimum.

In our approach, it is the boards and management of financial institutions, and only they, who are responsible for taking reasonable risks and managing those risks. Indeed, much of our guidance requires institutions to undertake risk management activities and to report on them. For example:

  • We require institutions to develop their own capital targets above the minimums we set.
  • Residential lenders are required to develop their own residential mortgage underwriting policies within principles we establish.
  • And institutions that have sufficient data and systems are allowed to use their own risk models to determine part of their capital requirements.

Now some have asked how we can rely on risk estimates that are provided to us by the institutions. Won’t they understate their risks? Of course, there is some short-term incentive for institutions to do just that. But Canadian institutions understand that their long-term interest is to maintain credibility with their regulator. That way, we can leave responsibility for risk management in their hands.

There is another reason why we generally have confidence in the results we obtain from financial institutions. We do a lot of checking. The incentive to underestimate risk may only be short-term, but it can be quite powerful. So we follow the old Russian proverb famously translated by Ronald Reagan: “Trust, but verify.”

A major strength of our approach is that it aims to ensure that regulatory compliance does not become a substitute for risk management. Indeed, financial institutions cannot comply with our expectations unless they actively measure and manage their own risks.

We need to stay focused on this approach as we finish implementing the regulatory initiatives aimed at responding to the global financial crisis. It is a challenge to implement this veritable slew of measures quickly, without slipping into an approach that values regulatory compliance over effective risk management. But regulation and supervision can support responsible risk management only if they don’t displace risk management.

The second challenge I mentioned is to balance attention to international standards with attention to the particulars of Canadian circumstances and experience.

Canada has been, and will continue to be, a strong supporter of international standards in financial sector regulation. International agreements on minimum norms are the best way for us to be able to impose prudent standards on our globally active financial institutions without impeding their ability to compete with foreign institutions. That alone is a strong argument in favour of adhering to these agreements, and being seen to do so.

Of course, this motivation for adhering to international standards depends on the extent of adherence by other countries. So we are watching how other jurisdictions implement international agreements, particularly Basel III.

At OSFI, we look carefully at the Canadian situation and Canadian needs before deciding how, and how closely, to adhere to each international standard. At times, we have chosen to impose standards above the international minimums. In principle, this can put our internationally active institutions at something of a competitive disadvantage. That can be the unintended, yet justifiable consequence of doing what is necessary to protect financial stability in Canada.

For example, my OSFI predecessors decided to go well beyond the Basel I and II capital requirements. Since then, it has become a truism that these decisions helped Canada to skate through the global crisis much better than countries that imposed only the minimum standard, if that.

Moreover, in the post-crisis world, our reputation for rigorous regulation has become a competitive advantage for our financial institutions as it helps them to be well regarded around the world. This pays off for them in better market access for funding, and lower funding costs.

It also has paid off by giving foreign regulators comfort when Canadian financial institutions expand their operations abroad. However, when we judge that there is little or no value in exceeding an international minimum, we stay quite close to our agreements with global counterparts.

Take, for example, the simple leverage limit that forms part of the Basel III package. Unlike regulators in many other countries, OSFI had established a simple leverage limit well before the crisis.

Based on that ample experience, we have decided to set the Canadian leverage limit at the international minimum. This is despite the fact that several high-profile jurisdictions will impose much stricter limits. Moreover, we are sometimes prepared to take a liberal reading of the standards when Canadian circumstances call for it.  

For example, subject to certain conditions, we accept preferred shares as Tier 1 capital, even though this is not consistent with a strict interpretation of the Basel III standard. We know these shares have been a reliable source of capital for Canadian banks, and we think they continue to make sense for Canada.

OSFI’s third challenge is how to promote financial stability across the institutions under OSFI’s watch, when they vary widely in their systemic importance and their capabilities.

At OSFI, we are well aware of the increase in regulatory burden since the global financial crisis. Part of the cost of regulatory compliance is fixed, so it falls more heavily on smaller institutions. Moreover, compared with our large banks, smaller banks using the standardized approach for their capital requirements have fewer options for managing the post-crisis increase in those requirements. We also recognize that Canada’s largest financial institutions clearly pose more risks to overall financial stability than do others.

That is why my predecessor, Julie Dickson, designated six major institutions as domestic systemically important banks, or D-SIBs. These banks are obliged to meet higher standards in some areas, such as capital and public disclosure requirements. They also face more intense supervision. Our D-SIBs are, not coincidentally, our internationally active banks.

So this is where our commitment to adhering to international agreements, like Basel III, most applies. All this means that the regimes for D-SIBs and for other banks have begun to diverge.

To support us in our approach to these two groups, we have created a new role of OSFI ‘small bank advisor’. The advisor, Scott Knight, is consulting with smaller institutions and helping to formulate regulatory guidance and to calibrate supervision so that the regulatory burden on smaller institutions can be more closely fit for purpose.

We recognize that, in the wake of post-crisis regulatory changes, we need to find new and better ways to listen to the perspectives of regulated entities, particularly the smaller institutions.
At the end of the day, we may not agree to everything we are asked to do. But all institutions are looking – quite rightly -- for evidence that, at a minimum, they have been heard and understood.


As I am only three months into the job and have eighty-one months left to go, I have not tried to make these remarks comprehensive. I will have more to say about prudential regulation of insurance companies, about pension regulation, and other topics as I continue.

Thank you.