Tolga Yalkin – Assistant Superintendent – Regulatory Response – Office of the Superintendent of Financial Institutions: We're always looking at our external risk environment and asking are the guidelines that we are working on, that we're consulting on and that we have in place, are they consistent with our view of the external risks and how they're changing and emerging?
Graham Johnson – Assistant Deputy Minister for Financial Sector Policy – Finance Canada: Hi. My name's Graham Johnson. I'm the assistant Deputy Minister for Financial Sector Policy at Finance Canada, and I'm here with Tolga Yalkin, Assistant Superintendent for Regulatory Response at OSFI.
Tolga, I'd like to talk to you a bit about OSFI’s role in setting guidelines for supervision of financial institutions, what those guidelines are, what do they mean, what purpose do they serve? I mean, let's let's start with the basics. What are guidelines? What role are they intended to play?
Tolga Yalkin: At its heart, our guidelines are our expectations of what prudent risk management looks like within financial institutions. Ultimately, they are intended to be a guide for financial institutions to help them figure out what they should have on their radar, the things that they should be doing, considering, etc. in order to manage risk appropriately.
And, you know, I mentioned guidelines a lot. That's often a vehicle in which we identify and articulate the expectations that we have of industry. But, in fact, those expectations can be found in a number of different documents, including regulatory notices and supervisory letters.
Graham Johnson: And how specific are these guidelines? How, you know, how specific are they in laying out your expectations with what financial institutions, you know, banks, insurance companies, pension funds should react, should manage the risks they face? And to what degree do you give the financial institution some freedom to set their own risk management parameters and policies?
Tolga Yalkin: Well, our general approach with guidelines is to articulate our overarching principles in pursuing them. So, we usually identify what the high-level principles are for any given risk area and our expectations associated with it. Sometimes, our expectations remain really high-level, and they allow financial institutions the margin of maneuver to be able to figure out how they want to go about pursuing and advancing a particular principle. There are also circumstances, though, where we are more specific in our expectations and that specificity is really intended, again to help financial institutions figure out how best to advance the overarching response to a particular risk area.
And at the end of the day, it really is the responsibility of financial institutions to manage their risks. The guidelines are there and their intent, the guidelines are intended ultimately to be an aid to them in supporting them to figure out how they go about doing that.
Graham Johnson: Financial institutions face a lot of risks and how do you engage with them? How do you give them feedback as to whether you feel that their response to this is appropriate, that they've put the necessary steps in place to address these risks? How does that sort of back and forth between OSFI and the financial institution work such that you're satisfied and the financial institution is satisfied that you know that their responses is appropriate?
Tolga Yalkin: There are actually two ways in which we engage with financial institutions when it comes to our expectations. The first is when we're articulating new expectations. Often in the form of a guideline, we consult publicly. That offers financial institutions and indeed other industry stakeholders and other stakeholders, for that matter, the opportunity to provide us with feedback on those expectations that we then take into consideration as we go about the process of finalizing the guideline in question. But the second stage is really supervision. So, we use those expectations as the basis of our oversight of financial institutions when it comes to their risk management practices.
Graham Johnson: I mean, financial institutions are global. And, you know, these large, globally important banks in all over the world. And I know that regulation and development of regulation also takes place globally. There's a number of international bodies, the Financial Stability Board and Basel Committee on Banking Supervision that Canada, OSFI and other agencies are active in to help develop these. How do you take the developments on the international Forum and apply those to Canada? How do you how do you distill what's really relevant for the Canadian financial system and how do you make those international guidelines fit for purpose for Canada?
Tolga Yalkin: Well, the first thing we do is we try to influence the development of those international standards to ensure that ultimately, they will be fit for purpose in Canada. So, we're very active when it comes to those different standard setters, whether it be BCBS, FSB, IAIS, we really do seek to make sure that the elaboration of those international standards reflects our Canadian perspective.
But then once an international standard has actually been developed, we then ourselves look carefully at it and ask ourselves: Are there any adaptations that make sense when we think about domesticating it in Canada, ultimately bringing it into one of our guidelines. And there we look very closely at the guideline, and we ask ourselves: Are all of the different elements of it fit for purpose in Canada? Do we need to change anything? Do we need to adapt anything? And then we ultimately reflect more or less those standards in our guidelines.
Graham Johnson: So I mean, that speaks to bringing the international guidelines and domesticating them for the Canadian marketplace, the Canadian financial system. But there's a range I mean, there's a big range of financial institutions in Canada, and I'll use banks as an example. We have some very large internationally active banks, but we also have some much smaller institutions. I mean, it can't be appropriate for them to face the exact same guidelines or regulatory burden, if I could use that word. How do you take proportionality into effect? How do you how do you calibrate those for, you know, a Royal Bank of Canada on one hand versus, you know, maybe a small credit union on the other?
Tolga Yalkin: You're absolutely right Graham. Things like the size, the complexity and the location of operations of financial institutions can change significantly the nature of the risks that they face. And it's particularly for that reason that we often state expressly in our guidelines that they're intended to be applied in a proportional manner. And what that means ultimately is that those factors are taken into account in terms of how the expectations might be applied in a particular context.
And the application of proportionality typically comes when we're supervising financial institutions. So, the expectations - some of them that can be relatively high level - allow a significant margin of maneuver for supervisors to determine what would be the proportional application of them in any given context, depending on the specific circumstances of the financial institution.
Graham Johnson: So, I mean, how do you know if you've done too much or how do you ensure that you haven't done too much? I mean, I'm sure you get feedback from many of the financial institutions that maybe you have, but how in OSFI’s judgment does it determine that it's struck that right balance between appropriate guidelines and oversight, but still giving the financial institution that margin to maneuver and to take risks?
Tolga Yalkin: So first, I would say that we, under our statute, are obligated to balance our regulatory approach with allowing financial institutions to take reasonable risks. So, whenever we're considering a new guideline or a new expectation, we're always asking ourselves, does it strike that right balance? The second thing I would say is we're always looking at our external risk environment and asking are the guidelines that we are working on, that we're consulting on and that we have in place, are they consistent with our view of the external risks and how they're changing and emerging? And so that's something we look at on a regular basis and our consultation schedule, for example, with the number of guidelines that we're going out to our stakeholders on, reflects that overall risk view.
Graham Johnson: This has been extremely interesting and informative. Tolga, thank you very much.
Tolga Yalkin: Thanks, Graham.