A Bias Toward Action

Speech - Toronto -

Remarks by Superintendent Peter Routledge, RBC capital markets bank CEO conference, Toronto, Ontario, January 9, 2023

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Thank you Darko for your introduction a​nd for hosting this conference. You have kindly invited me to speak here for the second consecutive year and this time, I have the privilege of speaking to a live audience.

Approximately three years ago, the extraordinary dimensions of the pandemic began to come into focus and it is undeniable that this health crisis has changed our country in innumerable ways. Most profoundly, we lost approximately 49,000 of our fellow citizens to the COVID-19 virus and I think it is appropriate to recognize that loss at this three-year point.

I also think it’s important to recognize that our financial system has emerged from the pandemic stronger. A system that has served our country well during the darkest periods of the pandemic and, notwithstanding the risks visible and not visible on our horizon, a system that will continue to do so in the years ahead, in my view.

Today, I want to take this opportunity to describe OSFI’s approach to acting early to safeguard the resilience of the financial system and outline some of the associated implications for participants in Canada’s financial system.

But, before I do that, I would like to acknowledge that I am speaking on the traditional territory of many nations, including the Mississaugas of the Credit, the Anishnaabeg, the Chippewa, the Haudenosaunee and the Wendat peoples. 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 fellow citizens of Indigenous descent.

The challenge of OSFI’s risk environment

Recognition of history more generally is good advice.

I began my service as Superintendent about a year and a half ago. At that time and since, I have stated the following as a central premise of my tenure: an intensified degree of uncertainty will characterize OSFI’s risk environment and challenge OSFI in unforeseen ways.

I have identified known, visible risks on our horizon: the housing market and household indebtedness, climate change, the digitalization of financial services, and the lingering impact of the pandemic. I also indicated that risks existed beyond the horizon that we could not yet see. So was I right? Let’s look at the evidence.

Since my speech to this conference a year ago, we witnessed:

  • Russia’s invasion of Ukraine and an extraordinary resistance to that invasion by the Ukrainian people;
  • An acceleration in inflation, a corresponding central bank response, the intensity of which was last observed in the 1980s, and the effect of those phenomena on markets and economies;
  • The final stages of the crypto-asset bubble followed by its popping.

If those outcomes were visible on the horizon one year ago, they were just barely so. Therefore, I believe my central premise still holds and prompts the question: how must OSFI adapt to this perilous risk environment – one in which the visible risks are quite daunting and the unseen risks over the horizon could yet swamp those visible risks?

OSFI’s Bias Towards Action

For me, there is only one answer - we base our strategy on a bias towards action.

We would rather err on the side of acting too early than be criticized for acting too late. That means that we accept the risks of engaging too early to minimize the risks that stem from being slow off the mark. This, we believe, is how OSFI will help to maintain and ensure resilience and contribute to public confidence in the Canadian financial system.

Now I fully understand that a proactive regulator can give some industry participants a basis for pause, maybe even concern. An effective way of alleviating these understandable concerns is via transparency – clear indications of how OSFI sees its risk environment and its plans for adapting to it.

To that end, we published a document we call our Annual Risk Outlook last April and outlined the key risks in our environment and our expected regulatory and supervisory responses.

Of course, true to the unpredictable nature of our risk environment, we published an update to that outlook only six months later ... a much earlier update that the “Annual” moniker implied.

While it may seem strange to update an annual document more than once a year, it is the right adaption to the uncertainty in our risk environment. And we will shift the cadence of this outlook to semi-annual for the foreseeable future. We will also continue to use public platforms, like this one, as another tool to provide more transparency in our direction as a regulator.

But our bias towards action means that OSFI will adapt, or change course, more readily and more frequently than in the past and this is a necessary and responsible adaptation to the uncertainty in our risk environment. So get ready for a busier, more active financial institutions regulator.

Let me take the remainder of my time to provide an update on what OSFI plans to do in 2023. To build up resilience and preparedness in the financial system, OSFI will:

  1. Ensure that FRFIs remain well-capitalized, liquid, with ample buffers to absorb shocks;
  2. Advance the Canadian financial system’s resilience to the physical and transition risks, and, more importantly, opportunities, triggered by climate change;
  3. Advance our financial system’s capacity to absorb the opportunities and risks triggered by the digitalization of financial services;
  4. Place more emphasis on how inadequate institutional governance can quickly metastasize into prudential risk.

Let me expand now on these topics.

1. Ensuring buffers are in place so that FRFIs can absorb shocks

As you know, we already began this work in December as highlighted in our announcement of the Domestic Stability Buffer (DSB). Effective February 1, the DSB will be set at 3.0% of total risk-weighted assets, leaving a Common Equity Tier 1 level of 11% for all our D-SIBs.

Our decision to raise the level of the DSB was based on our observation that systemic vulnerabilities have persisted at elevated levels and, in some cases, have risen materially in recent quarters.  We also expect that these vulnerabilities will continue into 2023, making the holding in this increased capital a prudent approach.

In addition, we also established a greater range for the DSB of 0% to 4%, creating more capacity to respond to rising vulnerabilities should that be needed.

These adjustments to the DSB are perhaps the most obvious examples of us acting early.  By raising both the rate and range of the buffer, OSFI has ensured that our biggest banks are better prepared for any potential periods of uncertainty by giving them more capacity to cushion any economic impacts resulting from the severe but plausible scenarios that may be on the horizon.

There’s a responsibility that comes in regards to the DSB on the side of OSFI as well – that responsibility to remember it’s a buffer, or it’s a rainy day fund – something you use in bad times.

One hundred thousand (100,000) jobs were created in December, so we’re not in really bad times, despite what we may see every day in the news. If there is a more dramatic turn in the economy we have resilient capital buffers to absorb that, and consistent with the notion that we’d rather accept the risks of acting early than be criticized for acting too late, we will act affirmatively in terms of using capital buffers.

In addition, a week after raising the DSB, we announced that we would hold our expectation for the minimum qualifying rate (MQR) for uninsured mortgages to the contract rate of plus 2.0%, or, at 5.25%, whichever is higher. The Minister of Finance set the same criteria as a requirement for insured mortgages directly or ultimately backed by the federal government.

The MQR has been a helpful measure, and many have agreed that the stress we are seeing in the financial system could have been a lot worse if it were not in place.

However, while undoubtedly the MQR is an effective tool, it is not all that OSFI has available to ensure that sound residential mortgage underwriting and that the risks associated with residential mortgage lending can be adequately managed.

We also know that we need to constantly re-examine our guidelines to ensure they remain fit-for-purpose and the best measure to guard against upcoming threats in the risk environment.

This is why in a few days from now, on January 12, OSFI will be launching a review of our B20 Guideline – guidance on Residential Mortgage Underwriting Practices and Procedures.

A great deal has changed since this guidance was first issued and we need to make sure that we are looking to the horizon and adjusting our strategies to ensure that we are prepared, and acting before issues arise.

To give you more colour, the MQR stress test has provided a margin of safety intended to limit the risks to FRFI’s from high consumer indebtedness. The question in our minds is: is this sufficient.

So we’ll look at a broader range of debt-serviceability tools including debt-to-income constraints, debt service constraints as well as the current interest rate stress test tool.

2. Continuing work to address climate related risks

Similarly, you can see our “bias towards early action” in the approach we have been taking to the prudential concerns surrounding climate related risks.

To me, the rationale for taking an early approach is most starkly outlined for us on the joint Bank of Canada/OSFI Risk Scenario Report where it showed that in the management of climate related risks the impact of acting early significantly lessens the negative impact on the economy and macroeconomic environment.

The more steadily the world moves toward a reduction in greenhouse gas emitting energy sources, the better the transition will be for Canada – it won’t be easy by any stretch, but it will be better.

We have to be prepared for an outcome where progress toward a reduction, or a transition away from greenhouse gas intensive energy sources is delayed or slowed and it speeds up suddenly… that’s the risk I will bequeath to my successor. Now is the time to begin to address that risk.

Last fall, we closed our consultations on Guideline B15, which sets out expectations related to FRFI management of climate-related risks, in which we saw unprecedented outreach and input from across the country.

We are planning to release the final version of Guideline B15 later in the spring, which will further refine our prudential expectations of the management of climate financial risk for FRFIs.

While international standard setters are continuing their work, we have decided to take action earlier and release our guidance of the prudential requirements and expectations and update it when the standard setter’s direction is made available. We would much rather be over-prepared and scale back rather than not have gone far enough, and then the need to retool.

I think it important to also call out the fact that sound climate risk management implies a response to opportunities as well as risks.

Part of Canada’s transition will be our response to the opportunities inherent in a shift towards non-green-house-gas emitting energy sources.

To that end, we look forward to the Sustainable Finance Action Council’s work on behalf of the Ministers of Finance and Environment and Climate Change Canada; particularly the taxonomy framework which we intend to leverage in our continuing work to ensure our capital rules fully capture the opportunities as well as the risks of climate change.

3. Taking a proactive approach to the risks posed by the digitalization of financial services

The digitization of financial services is another area where we know that especially in light of the events of 2022, the risks have not gone away. And perhaps more importantly, they continue to have their own momentum. 

On this issue, we do not have the luxury of waiting until “things have settled” or we have better data or more refined clarity on the future direction until we address them. Part of what we need to be ready and willing to do, is act with the best information that we have now, to prevent acting too late.

Again, one of the ways OSFI has done this is by taking an “evergreen” approach to guidance, to be able to signal our expectations to industry in a timely manner.

For example, last summer we issued an interim approach for capital and liquidity requirements in relation to crypto assets. Not unlike what we are doing on climate, this approach was issued ahead of the international standard setter. If required, we may update these in 2023 when we receive the new direction.

More recently, we have continued to act when we jointly issued a tri-agency statement with OSFI, FCAC, and CDIC to reaffirm that any entities that want to partake in crypto related activities should follow our existing guidelines. We are taking the approach that the same type of activities that have the same risks need to be treated and regulated in the same manner.

At the same time, we issued our Digital Innovation Roadmap – which is our proposed approach to supervising and regulating digital innovation and cryptoassets.

To be clear, this work is not being prompted because of a specific incident, but rather to ensure that we are prepared for both the seen and unforeseen risks on the horizon.

4. Emphasize the role of governance risks

Organizational governance and norms of behaviour are a catalyst for sound decision-making, prudent risk-taking and effective risk management. Therefore, a FRFI’s culture and governance can be a competitive advantage or an accelerant for reputational risks. History teaches that when a FRFI’s reputation risks accelerate, severe financial costs to all stakeholders of a FRFI often follow.

OSFI has recognized this for some time, having taken a number of steps including most recently the development of guideline expectations for FRFIs to proactively manage risks related to their governance.

We plan to release this draft guidance early next year for consultation with the final guideline to be issued along with a FRFI self-assessment tool to be issued in late 2023. 

We know we all need to do more, and to this end, we are also looking to Boards to enhance their oversight of FRFI culture as a core component of their governance accountability.

At OSFI, we rely on Boards of Directors to fulfil the important role as insightful, watchful stewards over their institutions’ franchise values, especially when risks intensify.

We count on them to focus intently on the long-term, and to realize that a dollar applied to capital or liquidity safety margins or another non-financial safety margin today is not a cost, but an investment in the long-term sustainability of their institution’s value. If a board fails in its duty, it fails its stakeholders: customers, creditors, shareholders.

While this risk usually only becomes publicly known in extreme cases, it often can be traced back as a root cause of many risks a FRFI faces. In fact, on the surface a risk can seem like it may be financial or prudential in nature, but in reality, it is only masking an issue with governance. That is why we need to be more proactive in managing this risk – to address it before a severe prudential problems emerge.

And that is why we are confident that directors of FRFI’s in Canada are mindful of their duties and humble before the personal reputation risks that would attend the failure of a financial institution on whose board they sit.


In all these examples, OSFI has acted and will continue to act so that Canada’s financial system remains resilient. The most insidious risk of all is the risk of complacency. While we cannot predict risks or how they will materialize into prudential concerns, we can ensure that we are prepared to meet them head-on, by upholding our bias toward acting early.

Thank you. I’d be happy to hear any questions.