Office of the Superintendent of Financial Institutions
CHECK AGAINST DELIVERY
Thank you for having me as your keynote for the opening of your forum. I have been to several previous events and have always enjoyed the opportunity to engage with leaders in the financial services sector to talk about the risks we see on the horizon and the plans we are making to address them.
You may have seen that during my first year as Superintendent I have been spending a lot of time speaking at public events. This is intentional, the issues that OSFI and financial services sector will need to confront in the new future require a broad area of engagement and involve a wider number of stakeholders.
The volatility and uncertainty that populate our risk environment will continue – heightened financial system volatility is our new normal. Risks are more volatile, complex, interrelated, and existential than those previously faced. Faced with such uncertainty, we have two options. First, we could stay on course with what has worked in the past or, alternatively, we could take action to understand this new risk environment and adapt ourselves with agility. It is not in my nature, nor in OSFI’s as an organization, to be complacent and the choice for us is clear. We will adapt with agility and urgency.
At OSFI, we have repositioned our institution and delivered an organization structure that reflects the challenges that we see on the horizon. You will notice several changes in titles and reporting lines
on our website. This restructuring will allow us to regulate and supervise federally regulated financial institutions and pension plans with an approach that aligns more effectively against the risks in our environment.
The institutions we supervise will clearly understand the questions they receive from supervisors, as they always have. And, OSFI’s approach will remain risk-focused and principles-based. We will affirmatively expand the array of risks on which we focus, those beyond traditional credit, market, and liquidity risks.
I encourage our colleagues within the regulated sectors to read our recently published
Annual Risk Outlook. As part of OSFI’s renewed commitment to transparency, we aim to share our views clearly on the clear and present risks to financial sector resilience. Financial system regulators, focused intently on systemic resilience, have a natural tendency to understate the risks to the system for fear of exacerbating them. But we think the risks of enhanced transparency brings far greater returns. The returns from open, frank dialogue will, we believe, produce better regulatory and supervisory adaptations, adaptations that will enhance financial system resilience. We also believe that the prudential lens that OSFI provides on these topics builds confidence in the financial system. Our
Annual Risk Outlook makes clear that we take the risks we identify quite seriously.
We outline seven key risks in our Outlook. Leaders at federally regulated financial institutions and pension plans, however, have an opportunity to adapt their organizations to these seven key risks in a manner that enhances the individual resilience of each financial institution and pension plan. Let me provide a perspective on a few of the risks we identify in our Annual Risk Outlook.
I spoke yesterday at the
2022 Payments Canada Summit and talked about the digitalization of the financial services industry. Digital innovation offers the prospect of tremendous value add for Canadians, but innovation can move faster than the regulation and legislation that safeguards Canadians. But, with the recent announcements in the federal budget and the focussed efforts of my colleagues at the federal, financial system safetynet agencies, we will adapt regulatory and supervisory parameters so that we expand and deepen competition, resilience, safety, and privacy throughout Canada’s financial system.
Today, OSFI released a revised guideline for consultation on third-party risks (Guideline B-10). The financial industry has long made use of third-party arrangements to introduce efficiency, drive innovation, manage shifting operational needs, and improve service. Today, financial institutions rely to a greater extent than previously on an expanded third-party ecosystem to execute their critical activities. This increases the likelihood that these arrangements could impact their operational and financial resilience. Our proposed enhancements reflect a more comprehensive set of third-party risks within this expanded third-party ecosystem.
The larger premise here is that where traditional products, processes and services are replaced by more innovative solutions, we must consider how to adapt the regulatory perimeter to ensure similar financial system activities have similar protections and boundaries. That sounds simple, but in a mature and sophisticated financial sector and oversight regime, the details and mechanisms are complicated.
Climate change risks can drive more traditional risks, including credit, market, insurance, operational and legal risks. Left unaddressed, they could quickly impact the safety and soundness of individual financial institutions and the Canadian financial system more broadly.
previous work shows how a disorderly transition to a low-carbon economy, through delayed action and abrupt global policy changes, will increase the probability of financial stress from transition risks. In particular, Box 3 of that report illustrates the macroeconomic implications of delayed actions. I encourage you to read Box 3 of that report with an eye toward medium-term financial system resilience. Over the course of this fiscal year we will conduct two further climate analysis exercises with financial institutions. One on flood risk impacts on residential mortgages, and the other on the impacts of repricing of securities portfolios and possible price-mediated contagion.
Through this work we will assess whether current internal targets at institutions and capital buffers sufficiently incorporate related risks. Building on our supervision of institutions will also help inform and develop principles-based regulatory expectations. This work will advance along- side increasing transparency in the industry by setting clear expectations and a path to enhanced climate risk management and disclosures.
We know that we are not alone in pursuing action on climate change. Citizens, shareholders, institutions and standard setters are all developing actions that will determine the speed and direction of interrelated risks. Doing our job well means that we cannot do it alone. We are actively looking for opportunities to broaden stakeholder engagement, within and outside the financial industry, domestically and internationally. By collaborating, coordinating, and sharing insights on a range of best practices is the best way to create a framework for future sustained stability.
Sharing our outlook and discussing our plans is intended to be an invitation to further progress. With complicated collective action problems like climate change, and interconnected risks with digitalization, holding clear positions and creating dialogue is a necessary first step.
And we know what the finish line looks like: a competitive, resilient, and safe financial system. What we don’t know what players will join or exit the race, what hurdles may yet arise, or how long the race will be. We at OSFI have already begun running in the right direction.