Remarks by Jeremy Rudin, Superintendent and Ben Gully, Assistant Superintendent, Regulation Sector to the House of Commons Standing Committee on Finance

Remarks by Jeremy Rudin, Superintendent

Ottawa, Ontario
May 21, 2020

Thank you for inviting me to appear today.

I am joined by my colleague, Ben Gully, Assistant Superintendent of the Regulation Sector at the Office of the Superintendent of Financial Institutions, or OSFI, as it is usually called.

OSFI is Canada's prudential regulator and supervisor.

We promote financial stability by keeping a close eye on the solvency, liquidity, and the safety and soundness of federally regulated financial entities.

Our core functions are regulation, which is setting rules and guidelines; and supervision, which is assessing adherence to these rules and making sure that institutions close the gaps we identify.

We regulate and supervise about 400 financial institutions – mainly banks, insurance and trust companies – and over 1200 private pension plans.

OSFI works closely with our 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.

We also share information and ideas with the international groups we belong to such as the Financial Stability Board, the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors.

I do not need to tell you that these are extraordinary times.

COVID-19 has caused many tragedies and great disruption, as well as forcing all of us to change how we live and work.

In these unprecedented times, Canadians can have confidence in our financial system because it is resilient and well prepared.

Our role has always been to think about how to prepare for, and respond to, severe scenarios, whether they affect a single financial institution or the entire financial system.

So, 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 some time.

In particular, OSFI strengthened its regulation and supervision of financial institutions in the decade that followed the global financial crisis even though the Canadian financial system performed well during that period.

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
  • 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.

One of OSFI's most important tools in the current situation is setting capital levels. You may wish to think of capital as a form of self-insurance, which provides both a buffer against unforeseen losses and an incentive to manage risk taking. Strong capital levels allow a financial institution to operate normally even if it experiences losses.

Part of our capital regime is the Domestic Stability Buffer, which requires Canada's biggest banks to set aside additional capital during good times, and then allows them to draw it down at time like this.

This positions banks to continue to support the economy during an economic downturn, even though they face the prospect of losses on some of their loans.

We reduced the Domestic Stability Buffer by 1.25 percentage points on March 13, which increased the lending capacity of Canada's largest banks by over $300 billion.

OSFI will continue to monitor the economic situation, and if conditions warrant, is prepared to release the remaining 1.0 percentage points of the buffer.

As part of that mid-March announcement, OSFI instructed banks to not undertake dividend increases and share buybacks so that the additional capital will be used as intended.

In early April, I issued a further statement on bank capital and dividends to contribute to a broader understanding of the capital regime in Canada, and the resilience that is already baked into the system before further actions are required.

While the preparations that we make before an economic downturn are essential, it is also important for us to respond to a downturn by adapting our supervision of the financial institutions and pension plans, and by adjusting our regulations and guidance so that they suit the current circumstances.

Since the start of the pandemic, OSFI has been closely monitoring the financial condition of banks and insurers; reviewing their responses and maintaining ongoing communication with them.

My colleague, Mr. Gully, will describe the regulatory measures that we have made recently.

Just before I call on Mr. Gully, let me reiterate that Canadians can be confident that OSFI is acting to meet its mandate of protecting depositors, policyholders, creditors and pension plan beneficiaries in these extraordinary times.

I will stop here so that my colleague can deliver his remarks and then we will be pleased to respond to your questions.


Remarks by Ben Gully, Assistant Superintendent, Regulation Sector

Ottawa, Ontario
May 21, 2020

Good evening.

As the Superintendent mentioned, one of OSFI's roles is to be prepared for threats to the financial system. Our guidance and expectations for financial institutions and private pension plans under our jurisdiction are aimed at supporting resilience.

OSFI's sustained efforts to review and develop guidelines have resulted in an effective supervisory and regulatory regime that protects depositors, policyholders, creditors and private pension plan beneficiaries while allowing institutions to take reasonable risks and compete.

Extraordinary times have required OSFI to ensure, more than ever, that our guidance is credible, consistent, necessary and fit-for-purpose in the Canadian context.

OSFI's first COVID-19 related regulatory announcement was on March 13 with the Minister of Finance and the Governor of the Bank of Canada. In that announcement, we suspended our planned policy consultations and provided some measured regulatory flexibility on capital and liquidity requirements. We have been in frequent contact with institutions and with our regulatory partners to refocus efforts on the issues at hand.

As the Superintendent mentioned, we continue to work with domestic and international partners. Domestic cooperation and collaboration is important given the independent mandates of each organization and the various measures taken by other parts of government.

International cooperation benefits us as we can learn from actions taken by our peers, share valuable lessons and make decisions that reflect the international context with the focus on resilience of Canadian institutions.

These frequent touchpoints and our ongoing supervisory work with institutions has resulted in a series of announcements and letters to the industry sectors we oversee. These have all been made available on our website.

Further, we have offered technical briefings for analysts, industry and pension plan administrators to share information and provide clarity on our expectations.

From these briefings and through communication with industry, we have developed questions and answers on recent COVID-19 related regulatory measures and put them on our website. These are updated regularly as conditions change and when OSFI takes action. This promotes a consistent understanding of OSFI's expectations across market participants and limits speculation that can occur in the absence of clear information.

While there remains areas of uncertainty in how the pandemic will affect financial institutions, the Canadian economy and the daily lives of Canadians, Canadians can have confidence that OSFI is working hard to continue meeting its mandate.

OSFI will continue to consider potential regulatory changes during this exceptional period and will make sure that any further adjustments are credible, consistent, necessary and fit-for-purpose.

We will continue to publicly communicate our expectations of institutions.

We and are happy to answer questions that you may have.