Superintendent Peter Routledge participates in a fireside chat at the C.D. Howe Institute

Moderator:

What are OSFI’s broad priorities for the next year and what are you focusing on for the second half of your mandate?

Superintendent Peter Routledge:

• Looking ahead, OSFI remains committed to ensuring the resilience of Canada’s financial system, adapting to new challenges while maintaining its focus on prudent and effective policy. We have built up financial resilience in the system and we will act when necessary.
• Canada's economy will change in the coming years because the geopolitical environment is changing. We’ve brought our regulatory frameworks up to the risk environments (in example: cyber risk, third party risk, climate risk guideline, Basel III, IFRS 17).
• I see the next three years as really cementing constructive changes we made at OSFI and over the last few years. Internally we had a re-organization so we can contribute to major policy initiatives such as digitalization, insurance regime, policy framework and removing regulatory burden.
• My long-term vision for our new integrity and security mandate is to break ground to create a secure information environment; for our National Security Sector and for OSFI overall.

Moderator:

Can you elaborate on the risks to the integrity and security of the Canadian financial system? How are geopolitical tensions affecting the institutions that OSFI oversees?

Superintendent Peter Routledge:

• Geopolitical events, including the potential for prolonged trade protectionism, can negatively impact industries and lead to greater vulnerabilities at the institutions that OSFI supervises.
• In 2024, OSFI issued an Integrity and Security Guideline with policy and procedure expectations for institutions. OSFI’s guidance aims to help institutions, and the Canadian financial system, become more resilient to these threats. We supervise key integrity security issues every day. We made a lot of progress, but we still need to continue working on those issues.
• Geopolitical uncertainty can increase the risk of threats to an institution such as cyber-attacks, foreign interference, or money laundering. OSFI has put in place guidelines to advance financial institutions’ ability to reduce the impacts of these risks.
• In a world of uncertainty, we’re making sure Canada’s financial system is resilient. While change in our risk environment is indeed constant, OSFI is well-equipped to proactively manage and adapt our regulatory frameworks to protect the financial system while fostering innovation.

Moderator:

Can you please comment on what you see as the current risks in the housing market and what OSFI is doing or considering?

Superintendent Peter Routledge:

• Delinquencies, while trending upward, continue to be lower than expected. Most Canadians are keeping up with their mortgages.
• 2025 and 2026 will be challenging years. As of January 2025, 56% or 3.3 million mortgages are set to renew by the end of 2026. Of these, approximately 61% (or 2.0 million) have yet to experience increased payments.
• We are likely to weather some headwinds in the housing market over the next few years, if the economy slows as result to trade tensions. But we have good conviction that the system will absorb those headwinds without sustained damage to the Canadian financial system.
• We’re monitoring mortgage loan trends around variable-rate mortgages with fixed payments as they could face material payment increases at renewal. That said, lower interest rates have reduced the severity of this problem.
• We have to keep our eye on risk concentrations in the real-estate secured lending market. That is why we introduced the new loan-to-income (LTI) limits for each lender that we supervise. We expect LTI limits to lessen residential mortgage credit risk at federally-regulated lenders. Limits become binding at low interest rate levels and/or when financial institutions choose to elevate the debt service ratios (DSRs) they will accept during underwriting.
• We developed the LTI limit tool after studying the Bank of England’s decision to implement it in 2014 and, following the pandemic experience, de-commission their mortgage stress-test in August 2022 due to the efficacy of their LTI limit.
• While both LTI and the minimum qualifying rate are intended to reduce mortgage lending risks, the LTI limit is applicable at the institution portfolio level, not to individual borrowers. As such, in my opinion, the LTI limit is well-aligned with OSFI’s mandate which is to supervise financial institutions, not individual Canadians.
• If the LTI proves to be a successful micro-prudential tool, OSFI will consider the implications for the MQR for uninsured mortgages, a measure applied to Canadian lenders transaction-by-transaction. The MQR has been a useful tool for protecting consumers from the unintended consequence of debt service costs rising substantially. And we will not be blind to that feature.

Moderator:

The stock market panic in early April saw increased selling of US Treasuries and an increase in resulting interest rates. What risks does this unusual reaction to market stress pose?

Superintendent Peter Routledge:

• In their recently published Financial Stability Report, the Bank of Canada outlined quite clearly the issues underlying the recent volatility in the US Treasuries market. The bank posits that “… the unusual rise in yields in April may have been partially driven by an unwinding of leveraged bets that US swap spreads would start to increase after having declined over the past few years.”
• The broader issue is the emergence of Non-Bank Financial Intermediaries (NBFI) in capital markets. These players employ leverage to intermediate in markets and one example is the U.S. Treasury market. When selling pressure rises sharply during market stress, it pressures intermediaries employing a high degree of financial leverage — which can lead to liquidity mismatches for NBFI that rely on Treasuries to meet short-term obligations.
• Market dysfunction can amplify stress, not relieve it. Instead of serving as a stabilizer, the selling of treasuries can intensify volatility. This can deepen financial stress both within individual institutions and across the broader system.
• Current risk management models may underestimate liquidity risk. Stress scenarios built into many liquidity risk management frameworks assume Treasuries can be sold quickly and at predictable prices. Recent events suggest that under extreme conditions, those assumptions may no longer hold — and institutions may need to rethink and recalibrate their models. The takeaway here is that U.S Treasuries carry market risk which needs to be closely managed.
• At OSFI, we’re watching these dynamics closely. We continue to emphasize robust liquidity risk management practices across institutions and are working to ensure that the regulatory framework anticipates and adapts to shifts in market behavior.
• We’re also working with international partners to understand this risk and learn how to measure it. If you learn how to measure it, we learn how to supervise it. Then it takes a coordinated effort across international regulators to have standardized approaches to bank regulation across jurisdictions, which in turn makes it much easier for banks and investors to understand measure and price risk.
• I refer folks to a recent paper by the Financial Stability Board on Liquidity Preparedness for Margin and Collateral Calls. This paper outlines key practices NBFI (and their leverage providers, banks) can employ to lower the aforementioned market risks.

Moderator:

A more hostile economic environment might make regulatory coordination across borders more difficult. What is OSFI’s thinking on the direction of future coordination of new rules and frameworks, but also the complications this lack of coordination creates in times of stress?

Superintendent Peter Routledge:

• Over the past 15 years, we have seen an increase in coordination. We have standardized approaches to bank regulation across jurisdictions. Again, this in turn makes it much easier for banks and investors to understand measure and price risk. There's interoperability in terms of measuring and managing risk, and that's been it a crucial source of strength for the internal financial system, as we saw in the spring of 2023.
• At OSFI, we continue to actively participate in international forums like OSFI collaborates extensively with international standard-setting bodies such as the Basel Committee on Banking Supervision (BCBS), the Financial Stability Board (FSB), and the International Association of Insurance Supervisors (IAIS).
• While the geopolitical environment has shifted, the commitment of our peers to international dialogue and cooperation remains strong. In times of stress, having pre-existing channels of communication is critical. Even partial alignment helps reduce fragmentation during stress events. Over the course of this year, my experience with central bankers and supervisors in other countries has remained quite constructive.
• While regulatory alignment between jurisdictions is not and has, in the past, rarely been perfect, international standards create a degree of commonality between countries. There are many benefits to working with international standard setters in the development of regulatory requirements for financial institutions. For example, alignment with international standards supports compliance for financial institutions operating across national boundaries.