April 3, 2020
Canadians can have confidence in our financial system during these current extraordinary times because it is resilient and well prepared. While much of what is happening now is clearly extraordinary, many of the challenges facing the financial system are elements that OSFI has been preparing for.
As Canada’s prudential financial regulator and supervisor of banks and most of its insurance companies, OSFI’s role is to ensure these institutions can navigate through a variety of severe yet plausible scenarios and disruptions. OSFI works to ensure that banks are still able to make loans and deposits available to Canadians; that insurance companies can pay policyholders; and that pension plans can continue to make payments to retirees.
Since the global financial crisis, OSFI has introduced a number of measures that are proving to be very valuable now. Even though the Canadian financial system had performed well during the crisis, OSFI subsequently strengthened its regulation and supervision of financial institutions. This included new requirements in areas such as:
- Capital adequacy – the capacity to absorb significant losses and continue to function
- Liquidity adequacy – the ability to make good on cash outflows as they come due even in stressful financial market conditions; and
- Operational resilience – the ability to function even during a serious disruption
Not only did OSFI raise minimum capital and liquidity standards, it further required banks and insurers to exceed those standards under normal conditions, thereby building robust buffers for use when necessary. All of this has contributed to ensuring that Canadian financial institutions are able to meet all of their requirements.
Among these buffers is the Domestic Stability Buffer (DSB). OSFI requires Canada’s largest banks to set aside additional capital beyond the regulatory minimum during good times, and then authorizes the release of this capital during challenging times so that banks will be able to continue to lend to businesses and households. OSFI had steadily raised the DSB since June 2018 from 1.50 percent of risk-weighted assets to 2.25 percent in December 2020.
On March 13, OSFI reduced the DSB to 1.0 per cent of risk-weighted assets, thereby enabling large banks to use this capital for loans to Canadian businesses and households, potentially up to $300 billion. The DSB reduction makes clear to markets that OSFI considers that measured declines in bank capital ratios are appropriate in the current circumstances and entirely consistent with the functioning of a well-capitalized and prudent institution. OSFI will monitor the use of this buffer so it can respond to further stresses, and will not increase it for at least 18 months.
Also on March 13, OSFI instructed banks and insurers to suspend share buybacks and not to increase dividend payments to ensure drawdowns of capital are only used to support lending and absorb loan loss provisions.
While OSFI’s actions are helping Canadian financial institutions weather the current storm, the liquidity support provided by the Bank of Canada and Canada Mortgage and Housing Corporation (CMHC) are also crucial to the stability of the Canadian financial system. The broader support to the economy provided by other arms of the federal government through loans, guarantees, grants and Employment Insurance has also been essential.
Most recently, on March 27, OSFI announced a series of adjustments to its capital, liquidity and reporting requirements and delayed the implementation deadlines for a number of planned regulatory changes. These measures, along with the previously announced suspension of consultations on new and revised guidance, will help reduce some of the operational burden on institutions.
OSFI will continue to consider potential regulatory changes during this exceptional period and will make sure that any regulatory or supervisory adjustments are
credible, consistent, necessary and fit-for-purpose. Specifically:
Credible – measures are transparent, preserve the integrity of the regulatory framework and are within international standards
Consistent – measures can be applied in the same way to all comparable institutions
Necessary – regulatory adjustments are not made unless other reasonable alternatives could not or should not be used
Fit-for-Purpose – changes made to adapt to the current extraordinary circumstances should make capital and liquidity measurements more accurate and avoid obscuring the situation, and should be phased out when no longer warranted
Since the start of the pandemic, OSFI has been closely monitoring the financial condition of banks and insurers; reviewing their responses to current events and plans for potential future scenarios. Communication with institutions has increased markedly, restrained only by the need to avoid adding to their new operational burdens.
As always, OSFI is working closely with its federal and provincial partners, including the Department of Finance, the Bank of Canada, Canada Deposit Insurance Corporation, the Financial Consumer Agency of Canada, Canada Mortgage and Housing Corporation and provincial counterparts. It is also maintaining its relationships and sharing information with international groups such as the Financial Stability Board, the Basel Committee on Banking Supervision, and the International Association of Insurance Supervisors.
Canadians can be confident that OSFI is making decisions and taking actions to meet its mandate of protecting depositors, policyholders, creditors and federal private pension plan beneficiaries.
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