Office of the Superintendent of Financial Institutions
I would like to acknowledge that I am speaking from the traditional unceded territory of the Anishnaabeg nation. I am grateful to have the opportunity to be present in this territory. I recognize that those joining us today may work in different traditional Indigenous territory.
I think that this acknowledgment is particularly poignant on the eve of the first National Day for Truth and Reconciliation. I encourage you to take a moment tomorrow to recognize and commemorate the legacy of residential schools, which more than 150,000 First Nations, Metis and Inuit children were forced to attend between the 1870s and 1997. I also urge you to read the Final Report of the Truth and Reconciliation Commission of Canada.
I would like to begin this speech with a quote that has resonated with me in my first several months at OSFI. I will return to it in English at the end of the speech and identify the author – a little mystery, suspense, and French practice to brighten your day.
« Nous devons maintenant faire face au fait que demain est devenu aujourd'hui. Nous sommes confrontés à l'urgence absolue du moment. Pour résoudre ce casse-tête qui se présente à nous et où se mêlent vie et histoire, agir trop tard est une réalité qu’on doit à tout prix éviter. L’heure n’est plus à l’apathie ou à la complaisance. L’heure est au dynamisme et aux actes positifs. »
This event is my first speaking opportunity since my arrival at OSFI in late June. The succession of a new Superintendent comes at a particularly consequential time. The global financial system has endured multiple bouts of volatility since the turn of the century, including the recession of the early 2000s, the Global Financial Crisis of 2008-9, the European sovereign debt crisis between 2010 and 2012, and the arrival of the COVID-19 pandemic.
In Canada, we weathered these volatility storms better than most nations and OSFI deserves praise for its role in helping Canada get through them successfully. This success is the result of the forward vision and risk focus of previous Superintendents. I am particularly grateful to my immediate predecessor, Jeremy Rudin. Jeremy has bequeathed to me an agile and capable organization that is prepared to confront the risks we see on the horizon and those that have not yet made themselves known.
Looking ahead, however, my new responsibility requires that I assume and plan for more frequent volatility storms, of varying degrees of intensity.
Volatility may arise from identifiable sources. Climate change will alter the cash flows generated by some capital assets and occasionally trigger noticeable changes in valuation. These capital asset valuation changes may be felt unevenly across OSFI’s regulated constituency. The digitalization of financial services will affect all business models and threaten an unknowable few; the rising incidence of cyber-attacks across the globe add to the volatility produced by digitalization.
Climate change and digitalization represent the known unknowns in OSFI’s risk environment. As Superintendent, I must make plans on the assumption that other macro sources of volatility will emerge from unknown places.
So how will OSFI respond to the opportunities and changes presented by this risk environment?
There are two basic ways an institution leader can answer this question:
With the support and encouragement of my colleagues at OSFI, I have chosen the latter answer. And so, I would like to sketch for you some early indications of how OSFI will transform itself.
Our transformation will have both outward-facing and inward-facing components; and while I suspect this audience will get more utility from our outward-facing component, I will touch on both.
I recognize that many audience members are eager to hear OSFI’s views on our capital distribution expectations, housing and residential mortgage credit, and other issues that emerged over the course of the 2021 federal election. I am afraid I will disappoint some of you in not addressing these questions and so I think it important to explain my rationale.
OSFI is an office of the Government of Canada over which the Minister (of Finance) shall preside and for which the Minister shall be responsible – I take that quote directly from our Act. In the interregnum between the end of the election and the formation of the government, it is, in my judgment, inappropriate to address key public policy issues.
I will start with our outward-facing transformational effort. By outward-facing, I mean the changes we make that will be visible to our regulated constituents. I will turn to our inward-facing transformational effort in a few minutes.
OSFI is both a supervisor and a regulator – we supervise institutions to ensure they are in sound financial condition and we make regulations to promote the adoption by federally regulated financial institutions (FRFIs) of policies and procedures designed to control and manage risks that threaten an institution’s financial condition.
Given what I have said to you about the risks presented by digitalization and climate change, I suspect it will come as no surprise that I believe OSFI will have to innovate boldly in our regulatory approach for each.
I will start with Climate Change.
To quote the latest Intergovernmental Panel on Climate Change (IPCC) Report,
“… unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to close to 1.5°C or even 2°C will be beyond reach.”
We have all seen 1-in-100-year events occurring more frequently than that term suggests. Droughts, wildfires, and floods are all occurring in tighter cycles than earlier climate change models predicted would accompany the global rise in temperatures. To avoid worse outcomes of warming greater than 1.5°C, nations, including Canada, are pursuing efforts to realize net zero GHG emissions by 2050.
Now, OSFI’s mandate says nothing about climate, but it does make us responsible for contributing to public confidence in Canada’s financial system. Getting to net zero by 2050 will mean Canada’s economy will have to adjust. Canada’s financial system will be a critical enabler to that adjustment and OSFI has an obligation to ensure that FRFIs and federally regulated pension plans (FRPPs) are fit to manage the risks that will accompany that adjustment.
So we will innovate and adapt our regulatory practices and that innovation begins now. Our focus for action has many components, two of which I will highlight today.
First, we are broadening our
engagement with stakeholders. We know that supervisory judgements must be made in the context of all of the other players in the economy and the actions taken by others. We have expanded our discussions and engagement with partners domestically and internationally.
We have collaborated with our partners at the Bank of Canada on a pilot project to use climate-change scenarios to better understand the risks to the financial system related to a transition to a low-carbon economy. A small group of institutions from the banking and insurance sectors participated voluntarily in the project. You will see the initial report on this effort before the end of the 2021.
We have also launched one of the broadest consultations in OSFI’s history on the subject of how FRFIs and FRPPs define, identify, measure and build resilience to climate‑related risks. You will see the results of this consultation this fall.
Second, given both the risks of climate change and the international response, the opportunity for a lingering transition to a net zero carbon-emission economy is behind us. Actions may be difficult now, but they will be more risky if we wait. Therefore, climate risk disclosures and climate risk management by Canadian FRFIs will expand materially over my term as Superintendent.
OSFI is mindful that we serve all Canadians in all regions; to them we pledge transparency and open-mindedness. We know that the adaptation costs will not fall evenly across the country and we have a duty to all Canadians to understand the impacts on to their local economies. This means that we will ultimately deliver agile, expedited disclosure requirements for banks and insurers in a manner that recognizes the existence of and minimizes outcome asymmetries across Canada.
Therefore, we are considering how to responsibly ensure FRFI and FRPP public
disclosures about climate risk meet the expectations of everyday Canadians as well as financial market participants. In the near to medium-term, we aim to support good decision-making within our regulated constituency about climate risk. Good decision-making flows from good information which, in turn, flows from good disclosures.
There are many international and domestic efforts to improve climate-risk-related financial disclosures. Our current position on climate-related financial disclosure has been to follow developments with the domestic securities regulators, and internationally with the IASB, the IFRS and IOSCO. A convergence of clear and comparable disclosures has not yet arrived.
Many financial institutions have adopted the Task Force on Climate-Related Financial Disclosures framework (TCFD), but it is clear the reporting of quality data presently, but not permanently, falls somewhat short of being able to provide the market transparency into climate risk envisioned by TCFD’s adherents.
This leaves OSFI in the position of considering disclosures within the scope of our mandate. This includes whether the TCFD Framework, or indeed other frameworks, are sufficient. It also means that we need to consider the nuances of applying a framework that is reasonable for banks, insurers and pension plans that vary in size and complexity.
Let’s turn to
OSFI’s approach to Digitalization. Digitalization is bringing with it the potential for innovation to unlock greater customer value for Canadians. But Canadians also expect their regulators to temper, not unduly restrict, innovations in a manner that fosters financial stability.
Complicating the matter for OSFI, digitalization can affect different players in different ways and at different times. Therefore, the distribution of digitalization risk across Canada’s financial system is not even.
We continue to refine our understanding of, and response to, digitalization risk though our public consultations, supervisory work, internal working groups and our efforts with other regulators. I would like to share with you four digitalization issues that OSFI is addressing.
New business models are shifting the design, manufacturing, distribution, and consumption of financial services to areas outside of OSFI’s regulatory perimeter, but not outside the scope of the risks that we are responsible for understanding and to which we must adapt.
Canada has an opportunity to let innovation in financial services flow through both new entrants and industry incumbents. As such, we will examine opportunities to ease competitive entry into the regulated space while ensuring a level-regulatory playing field for all entities providing financial services to Canadians.
Some of those new participants may be relying on the some of the same service providers as the institutions we oversee – this adds to the reasons why understanding
Third party risk is important. We have focused on FRFI reliance on third, fourth and fifth party service providers and have identified five opportunities for improvement of third-party risk management across the financial sector: those are, incident management, data security & access, risk assessment, continuity of critical operations, and capacity to manage cloud computing risks. We will discuss these opportunities in a guidance note to be issued early in the new year.
Cyber risk, in
August, we updated our requirements for technology and cyber incident reporting and issued an updated cyber security self-assessment. We will also be releasing new draft guidance on Technology and Cyber Risk Management this fall. These are steps toward a longer-term objective to improve the sharing of risk data and broadening the circle of trust among institutions, regulators and newer participants in the financial system.
How to respond to
Crypto-currency innovation is one of the questions that faces governments, financial institutions, and regulators. For example, the Bank of Canada is leading federal analytical work on this issue and OSFI is leveraging this work by adapting how we might evaluate the soundness of the financial institutions as and if digital money proliferates. For example, digital currency could lead to changes in the speed and scope of funding and liquidity for institutions, which will likely require an adjustment to how OSFI thinks about and measures these more traditional financial risks.
Climate change, digitalization, and the ever-present unknown unknown risks – what pandemic risk was a few years ago – present me as Superintendent with perils, certainly, but also with great opportunities. Therefore, we at OSFI would do well to ask ourselves, dispassionately and fearlessly, whether our organizational habits and practices are suited to the task. I call this effort our inward-facing transformation – an effort less visible but no less important to our regulated constituents.
If you accept my premise that OSFI’s new normal may be defined by more frequent volatility storms, then you will conclude that OSFI must level up its ability to adapt to and thrive in that uncertainty. Responding to change or risk events will be less helpful than anticipating uncertainty and transforming our business culture to thrive in this risk environment. To do that our organizational transformation will focus on three areas -- culture, data, and our supervisory framework:
Culture: A CDIC board member once counseled me that culture eats strategy for lunch – skeptical at first, I became convinced of this as I matured as CEO. We will seek to refine our culture so that it thrives in uncertainty. That means more emphasis on psychological safety (safe-to-fail) and diversity (safe-to-be-different). So we will re-articulate the promises and commitments we make to one another, we will train our leaders to represent and live those promises, we will give them recurring 360 degree feedback on their fidelity to those commitments, and we will evaluate their performance on the same.
We will also focus obsessively on diversity. Having a diverse workforce is a valid policy end, in and of itself. It reflects Canadian reality, the Canadian mosaic, and it is the right thing to do. And we pursue diversity for another very important reason. Diversity enables OSFI to leverage varied perspectives on the risks we face. We will be better prepared for whatever lands on our doorstep if we have an organization with diverse skills and mindsets drawn in full proportion from the Canadian mosaic.
Data: At OSFI, we benefit from a strong, principles-based approach to supervision and regulation, which provides us with the good relationships that enable innovative analysis and data requests. But, our legacy data environment doesn’t adequately fuel our analytical curiosity – in other words, we over-rely on ad-hoc data requests because our legacy data environment does not fully meet our needs. We will invest to change that outcome and that should be welcome news to FRFIs who have been so helpful to us with our ad-hoc data asks.
Supervisory framework: I should start by reminding myself that FRFI failures in Canada are quite rare, thanks to an historically strong supervisory framework. But, as our risk environment changes, so too must our supervisory framework. In so doing, we intend to look for ways to improve our transparency to FRFIs and to expand our risk appetite for early corrective action.
My intent for this speech was to set the table for the exciting and necessary transformation to come at OSFI. I hope that you share my sense of urgency in acting, with the recognition that further delay only increases risks.
Regarding urgency, I will return to the quote from the beginning of this speech, one made by a personal hero of mine, Dr. Martin Luther King. He spoke these words at Riverside Church in NYC in April 1967, one that guides me as I think about the risk environment that confronts my institution:
"We are now faced with the fact that tomorrow is today. We are confronted with the fierce urgency of now. In this unfolding conundrum of life and history, there "is" such a thing as being too late. This is no time for apathy or complacency. This is a time for vigorous and positive action."