Explaining OSFI’s Overall Risk Rating (ORR) system in plain language
In April 2024, the Office of the Superintendent of Financial Institutions (OSFI) introduced a new way to assess risk in Canada's financial institutions: the Overall Risk Rating (ORR) system. This system is part of OSFI's updated Supervisory Framework, which helps ensure banks, insurers, and pension plans remain safe and sound.
What is the Overall Risk Rating (ORR)
The ORR is a score OSFI gives to each federally regulated financial institution and pension plan. It reflects how risky the institution is and how likely it is to face serious financial trouble. The score ranges from 1 to 8, with 1 being the lowest risk and 8 being the highest.
Why did OSFI change the system
Previously, OSFI used a four-stage rating system. The new eight-point ORR scale gives more detail and allows OSFI to spot potential problems earlier. This helps institutions take action before risks become serious.
How does OSFI decide the ORR
OSFI looks at four key areas:
- Business Risk – Is the institution's business model sustainable?
- Financial Resilience – Can it handle financial stress? Does it have enough capital and liquidity?
- Operational Resilience – Can it keep running during disruptions like cyberattacks or system failures?
- Risk Governance – Does it have strong oversight and decision-making processes?
For larger institutions, OSFI also gives separate ratings for each of these categories. The weakest rating among them often determines the overall ORR.
What do the ratings mean
- ORR 1–4: Minimal to moderate risk. These institutions are stable but may need to address issues that have been identified.
- ORR 5–8: Higher risk. These ratings signal more serious concerns, and may require OSFI to step in with stronger supervision or corrective actions.
Why does this matter
The ORR system helps OSFI act early and support the resilience of the financial system. It also gives institutions clearer feedback and supports public confidence in Canada's financial system.
In short, the ORR is a smarter, more detailed way for OSFI to keep Canada's financial institutions healthy and resilient.