Opening remarks for a plenary session on the regulatory outlook, Assistant Superintendent Sanjiv Talwar, prepared for the IACMP Fall Conference via webcast, November 20, 2020

Introduction

Thank you Til, and thank you to the organizers, IACPMFootnote *, and the sponsors for having me here today.

Perhaps I’ll begin with OSFI’s COVID-19 response.

OSFI’s initial and continued response has been built on acknowledging challenges and making decisions that are credible, consistent, necessary, and fit for purpose.

These actions also utilized the strong communication channels and transparency regime with our regulatory partners and with the financial institutions themselves. Many of these connections were forged following the last global crisis and were used to build the resilience that has served us so well in this crisis.

Reforms since 2008 have increased the quality and quantity of global capital and liquidity requirements for banks, critical for the cushion needed when the pandemic began and volatility was driving markets. Additionally, new measures for systemically important banks were implemented and new counter-cyclical regulatory tools were created. There has also been a focus on improving the effectiveness of supervisors.

So far, the tools developed from the last crisis have demonstrated their effectiveness, even though the risk began outside of the financial sector. What remains to be seen is - what is left in the tank should there be further disruptions? - and more to the point of this panel - what lessons are we learning now that could lead to more regulatory reforms?

It would be fair to say that coming into the pandemic there were challenges facing the global economic outlook. In Canada, we were closely monitoring and evaluating a number of vulnerabilities. For example, the pandemic has added pressure to highly indebted households and businesses while asset imbalances have remained elevated. In addition, given our economy is reliant on trade, lower global growth presents the possibility that some external risks could spill over into the Canadian financial system.

The pace of economic recovery is difficult to predict and interest rates are expected to remain persistently low for the near term. This may alleviate some short-term strain, but will present challenges in the long run, both in the private sector as well as for fiscal and monetary policy support and flexibility.

Institutions and regulators have experience with a seasoned and tested regime for managing the more traditional financial risks.  However, the elements that we at OSFI and other regulators are considering more closely are the non-financial risks - those that relate to people, technology and organizational culture; and how to pursue operational resilience. COVID-19 has amplified these risks and tested the effectiveness of traditional regulatory responses.

In spite of the speed of the pandemic, the quick government responses around the globe to help save lives and prevent economic collapse will have lasting impacts. People have had to adapt to new procedures to keep safe at work or to working from home. Some are looking for new employment in an undeniably challenging job market.

For the most part the removal of regular social and work interactions have led to stresses at the individual level. In many cases they have led to increased awareness of both the importance of human connections and the limitations of technological solutions.

One upside may be the clear observation that stay at home precautions have resulted in measurable drops in green house gasses. This makes obvious the human contributions to climate change and the opportunities that we have if green solutions are adopted more widely. OSFI’s focus remains on the prudential risks associated with climate change.

We recognize that everyone, including the financial sector, will have to adjust to the new reality of climate change. Our recent work includes launching a pilot project with the Bank of Canada to use climate-change scenarios to better understand the risks to the financial system related to a transition to a low-carbon economy. And in the near future we will be launching a discussion paper to better articulate the questions of where we as a regulator can best contribute to financial resilience to climate risks. 

Added to climate risk is the increased attention to social inequities, economic disparities, and the global political uncertainty. When considered together the environment exists for potentially significant changes in behaviours and expectations of clients, and, more broadly, citizens.

All of these changes are putting pressure on traditional organizational cultures. People have new challenges in how they work with each other and interact with clients. Institutions have to adjust how they prioritize and respond to risks. That includes reviewing their risk appetites and considering how their culture contributes to resilient outcomes.

OSFI began concentrated work on assessing culture and conduct risk in 2019 with a new division. This group has developed an approach to collect and analyse information. It has the expertise to make sure that we can hit the right balance required in our mandate.

It used that information to establish the Culture External Advisory Committee that contributes practical advice on enhancing our supervision of cultures at institutions. The recent focus of our work is to look at how a move to “working from home” may impact an institution’s culture and the behaviour of its employees.

A big part of the financial sector’s development and growth has been through leveraging technology to improve services and reduce costs. Regulators around the world have tried to find ways to supervise developments and consider competitive forces that often move faster than our own rule setting processes.

Business responses to COVID-19 almost always included a significant shift of operations towards digital platforms and third parties. This raises the scope, and potential impacts, of cyber-risks. This, along with the rapid advances in AI, Machine Learning, and data storage and analysis in both the front and back offices creates shifting sands for institutions and regulators alike.

OSFI realizes that tech expertise is also found outside of the financial sector and has launched a technology risk discussion paper to try to capture a broader set of inputs to help meet our prudential mandate. Our paper considers the fact that other regulators are moving at different paces, with different objectives, and with different tool kits.

These diverse perspectives are why OSFI participates in many international standard-setting bodies like BCBS, and FSB but this work does take time. In the absence of consensus, the onus on financial regulators is to look at their jurisdictional practices to see where these risks may result in severe but plausible prudential risks for institutions.

This may create a challenging landscape for institutions but it is dangerous to underestimate the potential consequences of getting technology risk management or regulation wrong. With innovation and adoption occurring so quickly, changing technology will continue to be a focus for years to come.

One of the lessons from the current situation has been to move forward on ways to improve operational resilience. This is about focusing on outcomes rather than just operational risk management. The Basel Committee is doing outreach work on a number of draft principles. Once adopted, they will advance the baseline for operational resilience in the face of a wider range of risks.

In a more practical sense operational resilience means recognizing that uncertainty surrounding COVID-19 is part of the present and near future context. In this context we remain prepared to act if things do not improve as quickly as we all hope.

It is incumbent upon all of us to consider what we can do as individuals, institutions, and as regulators to build something better, more sustainable and more resilient.

Thank you.

Footnotes

Footnote *

These remarks were delivered as part of a panel discussion with other regulators at the International Association of Credit Portfolio Managers (IACPM) first virtual fall conference.

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