Clear Expectations: OSFI’s Priorities and Agenda

Remarks by Superintendent Peter Routledge, Virtual event hosted by OSFI via webcast on November 4, 2021


Thank you everyone and welcome to this OSFI-hosted call. I’m Peter Routledge, Superintendent of Financial Institutions.

Before I go any further, 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.

Recognition of our shared history is a crucial prerequisite for building trust and reconciliation with our compatriots of Indigenous descent. I urge you to read the Final Report of the Truth and Reconciliation Commission of Canada.


In my first speech as Superintendent last month, I argued that I assumed the responsibilities of Superintendent at a particularly consequential time. It’s true that OSFI has a pretty good track record of prudent financial regulation, and Canada’s financial system has fared extraordinarily well through several bouts of financial system volatility.

But as always we continue to find ourselves facing great uncertainties—for example, the continuing adaptation to the urgent necessity of reducing green house gas emissions and the digitalization of financial services.

These are extraordinary long-term risks that will require short-term responses. But I would like to first shift our gaze to both the immediate past and the near future.

In March 2020, when COVID-19 was officially recognized as a global pandemic, we took a number of important actions in March and April 2020 to preserve financial stability, as countercyclical offsets were triggered in response to the economic and financial shock caused by the country’s rapid adaptation to the risks of the pandemic.

For example, we implemented a range of regulatory measures:

  • We suspended regulatory consultations and initiatives to allow federally regulated financial institutions and pension plans (FRFIs and FRPPs, respectively) to concentrate their efforts and resources on adapting to the pandemic.
  • We temporarily changed our treatment of payment deferrals for mortgages, small business loans, and household loans so FRFIs would not have to set aside higher capital for loans on which they had permitted deferrals.
  • We clarified how exposures to loans offered through Government of Canada support programs would be treated for capital and leverage purposes.
  • We provided temporary exclusions to leverage ratio requirements, enabling banks to support lending while the country fought the COVID-19 virus.
  • We adjusted market risk capital requirements for banks so that the severe capital market volatility of spring 2020 did not constrain lending.
  • We introduced transitional arrangements for expected credit loss provisioning through the end of 2022, to allow a portion of allowances that would otherwise be included in Tier 2 capital to instead be included in Common Equity Tier 1 (CET1) capital.
  • We temporarily increased the covered bond limit to facilitate greater access to Bank of Canada funding facilities.
  • We smoothed interest rate risk requirements for participating businesses to remove unwarranted volatility in life insurer capital requirements.
  • And we suspended semi-annual progress reporting to OSFI on International Finance Reporting Standard 17, or IFRS 17, which sets out the accounting for insurance contracts.

This list, however, leaves out our most important accommodation for FRFIs: the release of the Domestic Stability Buffer, or DSB. But before I get into those details, I would like to set the context for this accommodation.

Several years prior to the pandemic, when the Canadian economy was healthy and growing, OSFI created the Domestic Stability Buffer (DSB), a counter-cyclical buffer. So what is the DSB, exactly?

Simply put, in good times we require Canada’s six largest banks—known as domestic systemically important banks, or D-SIBs—to hold an additional buffer of capital, more than our guidelines and rules require. We do this just in case hard times unexpectedly arise, so that banks have a buffer that can absorb the impacts of those events.

We know that when—not if—such hard times arrive, banks might otherwise restrict lending in order to preserve capital to meet our requirements. Should all banks take this same action at the same time it could then quickly exacerbate a financial or economic shock via a widespread drop in lending and consequently, in economic activity. Exactly what we don’t want to see during stressed times.

We want banks—more precisely our D-SIBs—to continue to serve their intermediation role and extend credit into the economy during downturns. And so, the DSB gives OSFI a tool to lower D-SIBs’ capital requirements during the worst periods of a recession. This is a safe and responsible action to take, because the DSB already required banks to hold more capital than needed during the good times.

At the beginning of March 2020, the Domestic Stability Buffer was set at 2.25% of risk-weighted assets. In addition to the rest of what we call the “capital stack”, systemically important banks had to have Common Equity Tier 1 capital of at least 10.25% of their risk-weighted assets.

On March 13, 2020, when COVID-19 struck in earnest, OSFI decided to lower the Domestic Stability Buffer to 1.00% of risk-weighted assets, a “release” of 1.25%. This release provided Canada’s six systemically important banks with ample loss-absorbing capacity, while at the same time freeing up about $300 billion in lending capacity. This DSB release supported ongoing lending through the pandemic and banks did not breach their capital requirements, exactly as intended.

At the same time as the DSB release, and in face of the prevailing uncertainty associated with the pandemic, OSFI took the prudent step of communicating our expectation that all FRFIs would halt increases to regular dividends and executive compensation as well as pause common share repurchases. Canada’s FRFIs met this expectation—an encouraging indicator of the responsibility of their boards of directors and senior management.

OSFI Removed Nearly All COVID-related Regulatory Accomodations in 2021

Today, Canada continues to make progress in combatting the COVID-19 virus. The financial and economic risks posed by the pandemic have abated somewhat, while FRFIs’ capital levels have remained high or have grown. Accordingly, OSFI has gradually removed most of the supervisory and regulatory accommodations put in place in the early days that followed the pandemic’s onset.

In June 2021, we announced an increase in the Domestic Stability Buffer. In fact, on October 31, 2021, the DSB for Canada’s six systemically important banks increased to 2.5% of risk-weighted assets, which is above the pre-pandemic level of 2.25%.

To date, however, we’ve maintained our expectation around capital distributions, reflecting our prudential focus.

Today, OSFI Lifts Its Capital Distribution Expectations

For several months, we have faced the question as to when should OSFI lift our capital distribution expectations, particularly as many financial risks triggered by the pandemic have receded?

I believe now is the time for OSFI to lift this expectation and, given the high degree of public interest in the question, I think it appropriate to explain our reasoning for this decision.

Key Arguments Underlying OSFI’s Decision

Three key arguments underlie our decision:

  1. The original rationale for the capital distribution expectations is no longer valid;
  2. The appropriate responsibility for capital distribution decisions rests with the boards of directors and senior management of FRFIs; and
  3. We have confidence that boards of directors and senior management will act responsibly in making those decisions.

1. The original rationale for the capital distribution expectations is no longer valid

You’ll recall we announced our capital distribution expectations as an appropriate counter-balance to all the regulatory accommodations we put in place to support Canada’s FRFIs through the pandemic. At this point in 2021, we have removed most of these accommodations.

Canada’s FRFIs have weathered the shocks of the pandemic quite well in 2020 and 2021. As such, we do not believe that lifting these expectations—which were always intended to be temporary—will detract from financial institutions’ ability to support the economic recovery or from public confidence in the Canadian financial system.

2. The appropriate responsibility for capital distribution decisions rests with the boards of directors and senior management of FRFIs

Boards of directors and senior management of Canadian FRFIs have a special responsibility when making decisions about their institutions’ capital. They must give due regard to all stakeholders, including depositors, policy-holders and other creditors as provided for by our mandate, but also customers, employees and shareholders as well as society at large.

Given the performance of Canada’s FRFIs through an array of economic crises, I believe it is right to conclude that, in the main, their boards of directors and management have developed a habit of making responsible decisions, perhaps encouraged toward this habit by their financial services regulator.

In fact, the OSFI Act—our governing statute, created and amended by democratically elected Parliaments in service to Canadians—instructs my office to allow FRFIs to compete effectively and take reasonable risks. What’s more, it stipulates that boards of directors are responsible for that competitive risk-taking.

Decisions on capital distributions are a key part of that competitive risk-taking: how much of earnings to distribute to employees as incentive pay, how much to return to shareholders in the form of dividends or common share repurchases, and how much to retain for reinvestment.

OSFI’s role is to supervise FRFIs and determine whether they remain in sound financial condition in the wake of these decisions. When a capital distribution fails to meet our definition of sound financial condition, we act urgently but quietly to maintain public confidence in the system, and to correct unacceptable digressions from sound financial practices.

This describes normal course and appropriate decision-making about capital distributions at Canadian FRFIs, but the pandemic was not normal course. It was an extraordinary tail-risk event which necessitated extraordinary supervisory and regulatory accommodations … and protections to complement those accommodations. As the accommodations have receded into the past, so too must the extraordinary protections.

3. We have confidence that boards of directors and senior management of FRFIs will act responsibly in making those decisions

Historically, the boards of directors of Canada’s FRFIs and their senior management have, by and large—and with the occasional exception that proves the tendency—made modest, humble, and responsible decisions regarding the strategic direction of their institutions and their capital distributions.

We at OSFI expect them to continuously re-affirm this tendency.

I would also like to point out, as Superintendent, that this expectation is not static nor does it exist in isolation.

A growing number of business executives, entrepreneurs, and investors have expanded their definition of sound business and financial management. Bodies such as the U.S. Business Roundtable and the signatories to the United Nations Principles for Responsible Investment and to the Glasgow Financial Alliance for Net Zero (GFANZ) have affirmed their commitments to make companies place more intense focus on environmental, social, and governance issues.

Coming out of a once-in-a-century pandemic, recognizing that brunt of the pandemic’s costs were borne unevenly across the country, humbled by the notion that their institutions fared quite well through this period, the boards of directors and senior management of Canada’s FRFIs will take account, I believe, of their complex environments in making these decisions.

They will recognize the special burden and responsibility that flows from their success and from the expanded environmental, social, and governance expectations of their investors. And they will make capital distribution decisions that enhance their institutions’ reputations and fulfill OSFI’s expectations regarding sound risk management.

Within OSFI, there are clear expectations for change

Of course, Canadians, including our regulated constituents, have legitimate expectations of OSFI. You would be quite correct to think that a prudential regulatory authority with oversight over Canada’s financial services industry should respond adroitly to the same risks and with the same rigour that we expect of federally-regulated financial institutions and pension plans.

Just as now is the right time to announce the lifting of OSFI’s expectations regarding capital distributions, it is also the right time to restate our intention of transforming OSFI to meet the opportunities and challenges presented to us by our risk environment. As I stated at the Global Risk Institute on September 29, I believe OSFI must prepare for recurring bouts of volatility and uncertainty, perhaps more frequent than in the first two decades of this century. Fervently do I hope this preparation will prove to be unnecessary but assuredly must we at OSFI adapt to this risk environment.

What does this mean for OSFI? It means we’ll seek to refine our culture so that it thrives in the face of this growing uncertainty. We will place more emphasis on creating a work culture where it is safe to make mistakes in pursuit of excellence. We will also reinforce our diverse, inclusive work environment and ensure beyond all doubt that at OSFI it is safe to be different and safe to bring your best and true self to work everyday.

It means we will reposition the pursuit of our mandate, to make strengthening public confidence in Canada’s financial system the overriding purpose of everything we do at OSFI.

And, it means developing a wider, more rigourous risk appetite – one fit for tackling climate risk, digitalization and other risks yet to appear on our horizon.

This week, we released a transformational blueprint to OSFI staff that will guide this work. Briefly put, we will transform OSFI along six dimensions – culture, data, risk management, stakeholder relations, policy innovation, and our supervisory framework. We believe this broad effort will transform OSFI to ensure we thrive in intensifying uncertainty so that the public’s confidence in a sound financial system remains unwavering.

Expectations for the industry are also clear

In summary, I seek the same clarity and responsible decision-making at OSFI that I expect from our regulated constituents. In other words, our expectations of FRFIs should be balanced by our own fidelity to those very expectations.

Whether you are a regulated entity or the regulator, ensuring you have a responsible and forward-thinking organizational culture in place will not just help mitigate the impact of any future “black swan” events—and rest assured, COVID-19 will not be the last of these—it will also blunt any criticism that due consideration has not been given to acting responsibly and prudently.

Echoing what I said earlier in this speech, when I announced the removal of our temporary expectations around capital distributions, we expect FRFIs to make decisions on other pressing matters—addressing climate risk, coping with technology and digitalization, etc.—through the same lens.

We use the term “prudential” a lot. In the narrower sense it means controlling risk and holding adequate capital. But to people outside the financial sector it carries a broader meaning: using good judgement and reason to ask “what could go wrong?” or “where should I exercise caution?”

I ask you to carry this broader interpretation with you. I ask our regulated constituents to think the way that their depositors do, or their policyholders, or their debtholders. What level of risk in any decision-making process is acceptable to them, and what would be unacceptable? Am I making decisions based on short-term criteria, or planning for the longer term?

OSFI’s authority only extends to those powers vested in us by Parliament. We cannot prescribe—or prohibit—investment in certain asset classes, or underwriting of certain issuances or project financing proposals, beyond what is set out in the statutes governing FRFIs.

But where our authority allows us to do so, we will work to ensure all FRFIs understand and account for ALL risk exposures, financial and non-financial.


OSFI is changing how we view risk, and we expect FRFIs’ senior management and boards of directors to change as well. We are working hard, both internally and in our external relations, towards the goal of ensuring Canada’s financial system is protected and respected worldwide thanks to the prudence exercised by all actors.

With my remarks today, I hope I have explained clearly and thoroughly why we made the decisions we made in March 2020, as well as a rationale for why now is the right time for OSFI to lift our expectations on capital distributions.

Accordingly, OSFI has just issued a statement indicating that financial institutions may once again increase regular dividends and executive compensation. Additionally, subject to the existing requirement for Superintendent approval, they may once again repurchase common shares.

I also hope I have impressed upon you all the importance of modest, humble, and responsible decision-making in future decisions around FRFIs’ capital distributions. I think modesty, humility and responsibility are traits that would serve us all well as we plan and evaluate our actions today and tomorrow.

I will now take any questions. Thank you.