Eyes Forward: COVID-19 Response and Beyond

As Canada and the rest of the world adjusts to the new realities of working and living with COVID-19, we are planning to resume our policy development and consultations to keep the financial system strong and resilient.

About five months ago, in mid-March, OSFI responded quickly to the pandemic. On March 13, a series of measures to support the resilience of financial institutions were unveiled and we suspended consultations and policy development. The most significant part of this announcement was the release of part of the Domestic Stability Buffer (DSB). This buffer is made up of capital that the six largest banks are required to hold in reserve and build up in favourable times so that it can be released when economic conditions become challenging. Releasing or lowering the DSB provided an additional $300 billion in lending capacity so that banks could continue to provide financial services and lending during a period of economic stress. At the same time, we instructed institutions to suspend share buybacks and not to increase dividend payments.

Throughout the pandemic, we unveiled a series of regulatory adjustments such as extending reporting deadlines, and delaying the implementation for a number of planned regulatory changes for banks, insurers and private pension plans. This included a portability freeze on defined benefit pension plans and clarification of the capital treatment expectations for loans issued under the federal government’s lending and guarantee programs.

All of these actions enabled financial institutions to keep serving Canadian households and businesses until conditions became more stable.

Communications

Given the quick developments and uncertainty, we committed to frequent public communication to help institutions and the public with a source of relative certainty in an uncertain environment. OSFI explained its actions through technical briefings for financial analysts and news media. A series of FAQs were issued and updated in April and were followed by briefings. We issued four statements, one on current OSFI actions and confidence, one on the bank capital regime and dividends, one on the usability of capital buffers, and more recently our plans to resume policy development work with the financial sector.

The industry sector-specific FAQs continued to be updated and further refinements were made to the portability freeze because of changes announced by the Department of Finance. There are now over 200 FAQs posted on our website. On May 21, both the Superintendent and Assistant Superintendent, Regulation Sector, Ben Gully, appeared before the House of Commons Standing Committee on Finance to discuss OSFI’s response to the COVID-19 pandemic. They welcomed the committee member’s questions and were clear in saying that Canadians could have confidence in our financial system because it is resilient and well prepared.

Looking Ahead

As the number of new cases of COVID-19 slows, governments are slowly reopening their economies in an attempt to return to more normal business operations. We are planning to hold our industry sector-focused risk management seminars virtually this fall, and we are also now looking ahead and will gradually restart policy development work.

Although there are many positive signs and progress in the battle against COVID-19, risk and uncertainty remains in the financial system, and OSFI remains ready to act, ensuring that the work we do keeps pace and responds appropriately to Canada's economic environment. We will continue to look forward when developing guidance and approaches that support reasonable risk taking but at the same time, provide the necessary safeguards for depositors, policyholders and private pension plan beneficiaries. OSFI is monitoring the economic environment to ensure that the regulatory adjustments we make follow our principles of being credible, consistent, necessary and fit-for-purpose.

OSFI is planning for our new normal; because at our core, we remain ever vigilant so that the Canadian financial system remains strong and resilient.

This special edition of The Pillar begins with details about our plans to restart policy development and consultations with the financial sector. It includes summaries of actions taken and plans for each industry sector of oversight, including deposit-taking institutions, insurance (life insurance, property and casualty insurance, mortgage insurance) and private pension plans. It also includes brief updates from OSFI’s Risk Support sector on cross-sector risk issues, and actions that OSFI’s Corporate Services sector has taken to keep employees safe and effective. As well as an update from the Office of the Chief Actuary.

We hope you find it helpful.

Prudential Policy Restart Priorities

Regulation refers to the process of designing and setting prudential policy. As the domestic environment increasingly stabilizes, OSFI is ready to restart much of its prudential policy work that was paused in March. However, in the current circumstances, any policy work that proceeds must consider the potential operational constraints faced by both financial institutions and OSFI.

In the past few weeks, OSFI has reached out to stakeholders to assess the operational capacity and readiness of institutions and pension plans. Based on these discussions, as well as OSFI’s own internal analysis of its strategic priorities and resources, a summary of a tentative agenda for publications and consultation processes is outlined below. OSFI remains flexible with the proposed timelines and ongoing discussions will continue with stakeholders.

Risk Management and Compliance Policy

OSFI will launch its policy restart with the publication of a wide-ranging discussion paper on technology risk in early fall. This paper will address a range of issues, including cyber security, third-party risk and advanced analytics (artificial intelligence, machine learning). Also in early fall, OSFI will release a draft guideline (E-4) for foreign branches (previously E4A of Chief Agents of Foreign Insurance Companies and E4B for Principal Officers of Foreign Banks) for public consultation.

In late fall, the reinsurance practices review, originally launched in 2018, will resume with the much-anticipated publication of a draft guideline (B-2), which articulates OSFI’s expectations on large exposures of property and casualty insurance companies. This draft guideline will be subject to a public consultation process that will continue into 2021. OSFI expects to complete the reinsurance review, which will also include a final guideline (B-3) on reinsurance practices, in mid-2021.

In early 2021, OSFI plans to issue a discussion paper on climate change risks faced by federally regulated financial institutions and private pension plans. As well, in the coming months, OSFI will review and strengthen a compliance management guideline (E13) to incorporate expectations for managing compliance in anti-money laundering and counter-terrorist financing.

Capital and Accounting Policy

For insurance companies, work on a number of capital initiatives has already resumed with consultations planned in the coming months. Regarding the IFRS 17 Insurance Contracts project, OSFI will resume progress reporting by regulated insurers, conclude the 2023 regulatory returns consultation process, and issue an updated IFRS 17 Advisory this fall. In addition, a quantitative impact study (QIS) and consultation on the capital tests adapted for IFRS 17 will launch this fall. For life insurers, work has already resumed on the development of a new standard approach for determining capital requirements for segregated fund guarantee risk.

Capital policy work for deposit-taking institutions is resuming with a particular focus on the domestic implementation of the Basel III reform package. This will cover potential changes to credit risk, operational risk, market risk, the output floor, and the definition of ‘capital’ and ‘leverage’. It will also include a more proportional set of capital and liquidity requirements for small and medium-sized banks (SMSBs). A public consultation process on proposals in the above areas will start in early 2021. OSFI will also develop Pillar 3 disclosure expectations, aligning timelines with the Basel III initiative.

In addition, OSFI plans to issue a consultative document or draft guidance on its expectations related to DTI asset encumbrance by mid-2021. Work will continue on exploring the implications of the expected credit loss accounting framework and the interaction with DTI regulatory capital.

Finally, in early 2021, OSFI will issue a discussion paper on the assurance on capital and liquidity returns for consultation, for both DTIs and insurance companies.

Policy Implementation

OSFI recognizes that COVID-19 continues to pose significant operational risks to financial institutions and will consider this when setting timelines for policy consultations, finalization of guidelines and implementation.

Deposit-Taking Institutions (DTIs)

Domestic Stability Buffer (DSB)

On March 13, OSFI reduced the DSB level to 1.00% (from 2.25%) to support banks' ability to supply credit to the economy by using the additional lending capacity to support businesses and households. On June 23, OSFI announced the DSB would remain at 1.00% until the next setting in December as part of the regular cycle, unless circumstances require an adjustment in the interim. If conditions warrant, OSFI is prepared to release the DSB further.

For more information please see: Domestic Stability Buffer Backgrounder.

Response to COVID-19

Large banks have implemented a number of government relief and payment deferral programs to support borrowers. During March and April, OSFI made a series of announcements to support the financial and operational resilience of banks. These included:

prohibiting dividend increases and cancelling future share buybacks
a series of regulatory adjustments to existing capital and liquidity requirements, including clarification that where loan payment deferrals are granted, these loans will continue to be treated as performing loans to assist banks in responding to customers managing through hardships
additional regulatory flexibility measures, including temporary exclusions to the leverage ratio to support lending, lowering of the capital floor for IRB banks and delayed implementation of certain regulatory reporting changes

For small and medium-sized banks, key measures included:

payment deferrals – in situations where loan payment deferrals are granted by institutions, these loans will continue to be treated as performing under the CAR guideline and not subject to a different risk weight under the standardized approach to credit risk for up to six months from the initial deferral granted
transitional arrangements for capital treatment of expected credit losses– a three-year transition for expected credit loss provisioning was introduced, which results in a portion of allowances that would otherwise be included in Tier 2 capital to be included in CET1 capital
Pillar II buffers – a process was introduced for institutions using the standardized approach to credit risk to consider using their Pillar II capital buffers, after first discussing with OSFI
leverage ratio exclusions – institutions are allowed to temporarily exclude central bank reserves and sovereign-issued high-quality liquid assets from the leverage ratio exposure measure
LCR/NSFR adjustments – a number of changes and clarifications were unveiled to liquidity requirements so that regulatory liquidity metrics do not impede the objectives of the various government programs

In addition to these measures, OSFI has delayed (to Q1 2023) implementation of a number of regulatory reforms, including:

the final set of Basel III reforms, designed to address weaknesses in banks' resiliency revealed during the financial crisis
the SMSB capital and liquidity framework, a more tailored set of requirements that takes into account the unique nature of these institutions

Additional information on these actions and other related topics for deposit-taking institutions is also available on OSFI’s FAQ webpage.

OSFI is closely monitoring the economic recovery and the pace and effects of the unwinding of various response measures to take effective supervisory actions that support financial and operational resilience.

Operational Resilience

At the onset of COVID-19, financial institutions began shifting their traditional delivery and operating models to a remote environment to provide continued services to clients. The ability to deliver critical services during prolonged periods of operational disruption and under a different operating environment such as COVID-19 is key to the operational resilience of the banks and industry. OSFI has been closely monitoring the resilience of banks and plans to incorporate the practices observed and lessons learned in its contributions to the Basel Committee on Banking Supervision Working Group on Operational Resilience (comprising representatives from several other BCBS member jurisdictions) and supervisory expectations.

Insurance

In addition to OSFI’s initial response to COVID-19 on March 13, a follow-up announcement on March 27 included a number of steps to reprioritize its work and requirements to allow insurers to focus on their resilience efforts and support their contributions to financial stability, including:

suspending consultations and policy development on new or revised guidance and the requirement for insurers to provide semi-annual progress reporting on IFRS 17
setting the expectation that mortgage insurers should not consider a mortgage loan to be delinquent or in arrears if a DTI has approved a deferral of mortgage payments, and the borrower respects the payment deferral terms and conditions
offering flexibility regulatory filing deadlines for insurers encountering operational difficulties due to COVID-19

On April 9, OSFI announced further steps, including:

where payment deferrals for mortgage loans, leases or other loans are granted by life insurers due to COVID-19, these loans and leases may continue to be treated as performing assets under the Life Insurance Capital Adequacy Test (LICAT) for the duration of the payment deferral, up to a maximum of six months

where insurance premium payment deferrals are granted by insurers because of the impact of COVID-19, OSFI is not requiring the related receivables to be subject to higher credit risk factors per the LICAT, Minimum Capital Test (MCT) and Mortgage Insurer Capital Adequacy Test (MICAT) guidelines (this treatment applies for the duration of the premium payment deferral, up to a maximum of six months)
introducing changes to address identified concerns with the LICAT methodology causing increased and unwarranted volatility in the interest rate risk capital requirements for participating products

Additional information on these actions and other related topics for insurers is also available on OSFI’s FAQ webpage.

Life Insurance Risk Management Seminar

On June 25, OSFI hosted its annual risk management seminar for life insurance companies via webcast. The seminar provided an opportunity for OSFI officials to engage virtually with 125 representatives from life insurance companies.

Seminar discussions included the post-COVID-19 world and the ways in which operational risk will evolve; updates on LICAT and IFRS 17; and a look at OSFI’s plans and priorities over the upcoming years.

A video of Assistant Superintendent Neville Henderson’s opening remarks and the discussions is available here.

Engagement Sessions with the Property & Casualty Industry

On April 8, May 12 and June 26, OSFI hosted call-in sessions with representatives of federally regulated property & casualty insurance companies and industry associations. Officials from the Capital and Supervision areas provided updates on OSFI’s activities in response to COVID-19 as well as other topics.

Private Pension Plans

On March 27, OSFI announced a series of regulatory adjustments to protect the interests of pension plan members and beneficiaries and to allow administrators of federally regulated private pension plans to focus their efforts on addressing the many challenges posed by COVID-19.

OSFI implemented a portability freeze by prohibiting all portability transfers and annuity purchases relating to defined benefit provisions. During this temporary freeze, plan administrators may request the Superintendent’s consent for transfers and annuity purchases where the administrator is of the opinion that they will not impair the solvency of the pension fund. In addition, OSFI extended by three months the deadlines for submitting required annual filings, remitting pension plan assessments, and distributing annual statements to plan members and other beneficiaries.

OSFI kept pension plan stakeholders aware of the measures it took to protect plan members and beneficiaries through information posted on its website and technical briefings. Communication and feedback from stakeholders, as well as through information sharing initiatives with other regulators, was crucial in developing an effective policy response to COVID-19.

On May 7, OSFI eased the portability freeze by permitting portability transfers for members eligible for early retirement, subject to specific transfer criteria. This targeted easing accommodated members at (or near) retirement who were counting on being able to transfer their funds, while guarding against transfers that could impair plan solvency.

In addition, OSFI increased its monitoring of risk management, an employer’s ability to make contributions, business continuity, and employers operating in sectors highly impacted by the crisis. Since the last week of March, OSFI has been doing weekly reviews of the estimated solvency ratio of the defined benefit pension plans to stay on top of the impacts of volatility.

In response to these measures, plan members, plan administrators and other industry stakeholders submitted an unprecedented number of enquiries. By July 31, OSFI had responded to nearly 400 written enquiries on these measures. Typically, OSFI would respond to fewer than 150 enquiries over the same period.

OSFI will continue to review its expectations and supervisory practices related to pension plan investments and defined contribution pension plans. In addition, OSFI will review its expectations and supervision of risk management practices with respect to technology and climate risk. Finally, OSFI expects to resume work on guidance that was suspended, including the Actuarial, Benefit Reduction and Registration, and Termination guides.

Additional information on these actions and other related topics for private pension plans is also available on OSFI’s FAQ webpage.

Risk Support Sector

Leading up to the declaration of a pandemic in March, OSFI’s Risk Support Sector immediately increased monitoring activities of non-financial risks to focus on business continuity planning, transactions processing, regulatory compliance, third parties, cyber security and technology; and people, including health and safety. Financial institutions demonstrated their ability to maintain critical operations in a distributed work environment, which speaks to their operational resilience.

For financial risks, OSFI increased the intensity of its surveillance and assessment, shifting resources to focus on the most vulnerable financial institutions for both credit and liquidity risks. Equipped with an updated view of potential risks and their impact on institutions, OSFI revisited supervisory plans, including the need to conduct industry-wide analysis on key activities impacted by COVID-19. OSFI also refocused its Emerging Risk Committee to focus on potential second and third order risks arising from COVID-19 to determine the appropriate supervisory response.

The importance of timely and accurate data and long-term investment in IT infrastructure cannot be underestimated. In a crisis, good data aids in critical time-sensitive decision making. We have observed that financial institutions with existing data/digitization strategies have been better equipped to pivot to the new working environment. Well-prepared financial institutions have been able to leverage those strategies to better facilitate the work from home experience and accelerate digitization strategies for customers as a competitive imperative. Quick and clear communication with both internal and external parties has proven critical in navigating uncertainty, and is supported by effective coordination of data gathering, i.e. broader coverage from rating agencies and credit bureaus and better coordination of large data calls.

Collaboration with Partners

The sector worked with other federal partners on various liquidity measures to ensure programs had the desired outcomes. These programs were instrumental in helping to stabilize the Canadian liquidity landscape early. Coordination and relevant information sharing has continued between OSFI and partner agencies.

To promote best practices, we shared the results of a third-party risk management study with industry, which highlighted a range of practices at institutions, and a Technology Risk Bulletin on Multi-Factor Authentication to encourage increased rigor regarding authentication mechanisms.

The sector is also executing OSFI’s data strategy. Work in data analytics is accelerating to aid surveillance assessments and an approach to the digitization and automation of financial products and services.

To support the new supervisory environment, OSFI adapted the use of existing technologies to support virtual and digital supervision. OSFI has also shifted focus to work from anywhere capabilities, and developed guidance on how to use the available technology tools to support supervisory work. A guide was developed to map appropriate technology to supervisory work and processes, and guidance on how to use the technologies in an effective and secure manner for supervisory work.

Corporate Services

OSFI began taking measures such as restricting travel and visitors to its four offices starting in February, but fully implemented its business continuity plan on March 13. By March 15, all of its approximately 800 employees began working from home. Throughout this time, OSFI has ensured that employees continued to have access to the tools and equipment that they needed to effectively execute the Office’s core mandate.

A key lesson learned when it comes to business planning was that the OSFI strategic plan, and in particular, the four strategic goals served OSFI well during very challenging and unprecedented circumstances. That is why the strategic plan and its goals will remain unchanged. The plan keeps OSFI focused on what it needs to do.

OSFI has developed a Work from Anywhere Strategy that will last until June 2021. This means that for most employees, OSFI will continue to support ongoing telework. In circumstances where employees are not able to work outside the office, it will find ways so that these employees can safely re-enter the office.

Office of the Chief Actuary

This year is shaping up to be another busy, albeit unusual one for the OCA. The programs under its responsibility affect a majority of Canadians: Canada Pension Plan, Old Age Security, Employment Insurance (EI), Canada Student Loans (CSL) as well as pensions and benefits programs for federal public servants and veterans. The financial sustainability of those programs may be greatly affected by the unprecedented situation created by COVID-19. The direct changes to program provisions such as the CSL program as well as the uncertainty about the impacts on the financial and labour markets and the potential effects on demography will add to the challenge of determining the assumptions for the five statutory actuarial valuations to be completed.

May 2020 also marked the release of the results of the independent peer review of OCA’s 30^th Actuarial Report on the Canada Pension Plan. The independent panel’s findings confirm that the work performed meets professional standards of practice and statutory requirements, and that the assumptions and methods used are reasonable. The panel also stated that the report fairly communicates the results of the work performed by the Chief Actuary and her staff.

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