A supervisory approach fit for the future

Good prudential supervision is vital for Canada’s financial system to function effectively. Our Blueprint for transformation includes plans to update our supervisory approach so that it remains relevant for years to come.

We supervise approximately:

  • 140 Canadian banks, trust companies and loan companies
  • 18 foreign bank offices
  • 200 insurance companies
  • 1,200 private pension plans

If any of these organizations that we regulate take excessive risks, it could jeopardize the safety and soundness of Canada’s financial system. In these cases, our supervisors will act to preserve stability.

“4 Cs” approach to supervision

Our supervisors look at 4 broad categories when evaluating the financial institutions and private pension plans we regulate:

  • Capital: at levels to absorb potential shocks and continue doing business
  • Cash: for liquidity purposes, with different approaches for banks and insurers
  • Credit: ensuring organizations manage risks associated with loans and other forms of credit
  • Contingency: ensuring financial sector management and boards have plans to address the most severe but plausible scenarios

Evolving risks in the financial environment

The risks facing the banks, insurers and private pension plans we supervise are changing. Our approach to supervision must also change to keep up with these new risks.

By offering insights into how our approach is evolving, we hope you’ll better understand our role in maintaining the soundness of Canada’s financial system.

Updating our supervisory framework

To supervise the financial institutions and private pension plans we regulate, we use:

  • a guiding framework
  • human insight and judgment
  • technology-based tools

A new supervisory framework will be effective on April 1, 2024. It will guide our oversight of federally regulated financial institutions and private pension plans.

This new framework will be a comprehensive update to our existing Supervisory Framework. It will include new areas of evaluation combined with a ratings scale that together will allow for more effective intervention at the first sign of an emerging issue.

A new Supervision Institute

We’re also developing a Supervision Institute to help our supervisors enhance their skills by offering:

  • new or improved supervisory tools and practices
  • new supervision technologies

Ongoing updates

In the coming year, we’ll provide more communication about requirements and timelines before the new supervisory framework comes into effect (April 1, 2024).

A word from the Deputy Superintendent of Supervision

“OSFI will never rest easy when it comes to the role of supervision in promoting financial safety and soundness. Our supervisors are on the front-line, verifying that Canada’s federally regulated financial institutions and private pension plans are meeting regulatory expectations through effective corporate governance and sound risk management. We’re working hard on transforming our approach to supervision that builds capability and is best suited for the changes in the risk environment. I look forward to sharing more on our approach to supervision throughout the coming year.”

– Ben Gully, Deputy Superintendent, Supervision sector

Video: Learn more about OSFI’s supervisory priorities

How is supervision like a soccer match? Find out in this video as Ben Gully talks with Jing Yang, the Bank of Canada’s managing director of financial stability, about the “four Cs” of our approach to supervision, our Annual Risk Outlook and more.

Discussion with Ben Gully on OSFI's Supervisory Approach

Transcript – Discussion with Ben Gully on OSFI's Supervisory Approach

[OSFI logo] 

[Discussion with Ben Gully on OSFI's Supervisory Approach.] 

[Jing Yang. Managing Director at the Bank of Canada's Financial Stability Department.] 

Jing Yang:
Hello, I'm Jing Yang, Managing Director at the Bank of Canada's Financial Stability Department. Today, I am in conversation with Ben Gully, Deputy Superintendent at OSFI. Hello, Ben. 

Ben Gully:
Hi, Jing. 

Jing Yang:
Welcome to joining me for the conversation today on the supervision of the financial system in Canada. 

Ben Gully:
Thank you. 

Jing Yang:
Let's start with the basics: What is supervision and why is it important? 

[Ben Gully. Deputy Superintendent – OSFI’s Supervision Sector] 

Ben Gully:
So, thanks for joining me today, Jing. And I would say the following: OSFI’s role is about the safety and soundness of the institutions it oversees. And the safety and soundness of institutions depend on setting clear expectations - that's called regulation - and then monitoring how well institutions do against those expectations. And that's called supervision. So, supervision is about assessment. It's about promoting good risk management practices. And where we don't see things that make sense, or potentially may be problematic, that we intervene and we take action early to correct those. 

Jing Yang:
So, if you don’t mind, is there a simpler way…can you explain Supervision for someone who is not so close to OSFI? 

Ben Gully:
So probably the best analogy for that would be… We could use a sports analogy like a soccer match or a tennis match. The rules of the game are set and the referee - in this case this would be OSFI -  would be overseeing how the players are performing, correcting actions that are not consistent with the rules of the game and hopefully ensuring that the crowd - in this case depositors and creditors and policy holders - but the crowd, the people that are observing the game, are able to do so in a way that they can enjoy the game and feel comfortable about what's going on. 

Jing Yang:
I like your football analogy. Next time I’ll try that. Next question is: could you explain to us a little bit about the supervision priorities OSFI has for this coming year? 

Ben Gully:
So, our priorities are reflection of the outlook we have for risks. And obviously there are a number of uncertainties and challenges out there. And as supervisors, we have to consider how those may or may not affect the financial institutions we supervise. Ultimately, with conditions as challenging as they are, we need to really be focused on the financial resiliency of the institutions that we look after. And in our mind that comprises what we call the 4Cs. Making sure that they have Cash, Capital, Credit quality and Contingency planning as we look forward. And if I can just expand on each briefly. Cash speaks to the ability to pay obligations as they come due. Capital speaks to the ability of an institution to absorb unexpected events, unexpected losses, particularly in a stress event. Credit speaks to the credit risks that can arise from lending to borrowers or transacting with counterparties. And then finally, contingency planning is, well, how are your operations orientated for situations that may disrupt you. How well do your people, your processes and technologies operate. And that alongside the financial contingency plans that you have for cash and capital as well. 

So, the 4Cs I think are very important for our priorities going forward, and the work that our supervisors are concentrating on will be based around those priority areas. 

Jing Yang:
I quite like this 4Cs. It's a very nice way to summarize and easy to remember. Would you like to elaborate a little bit more about capital, and why capital is important for FRFIs? 

Ben Gully:
So, capital adequacy and capital are a true indicator, a key indicator for us around the financial condition of an institution or an organization. So again, it's an ability, it's an amount of reserves that an organization has to absorb those surprises that can come from losses due to credit risks, market risks, anything that can potentially challenge the balance sheet of the organization. 

So we spend a lot of attention and care to what we call the capital strength - the capital adequacy of firms. We have a number of rules around that. And a lot of our actions that we take - what we call interventions - are based on how strong those measures of capital are. 

Jing Yang:
Yeah. Just to plug in, I totally agree with this. In the…under BCBS [Basel Committee on Banking Supervision], in the Basel III evaluation task force that I chaired, we really found the capital absorption capacity…loss absorption capacity played a such a huge role in the strengthening of the whole financial system. And if I may, when I look at OSFI, OSFI supervises both banks and some non-bank financial institutions, and you mentioned the 4C principles. Do this equally apply to banks as well as [the] non-bank financial institutions we call NBFIs? 

Ben Gully:
So at OSFI, the non-banks that we look after are primarily insurance companies, Life and PNC and mortgage insurers, as well as private pension plans that are federally governed. I would say that the principles of the 4Cs most definitely apply to insurance companies because the fundamentals I think, are very relevant to financial resiliency. There are different considerations. So for capital, macroeconomic factors may be less directly relevant to an insurance company than a bank. But nonetheless, there are headwinds that can affect business. And also for the insurance industry, there's been a very big change in the accounting regime. And IFRS 17 - the sort of basis for valuing insurance contracts - is a big change and that too, is a regime that's new and probably requires some prudence in capital as we move forward. 

If we turn to cash, there again… Obviously they don't have deposits which is obviously one consideration in cash, but they do have…[they] potentially engage in derivative contracts. So, there can be collateral calls as insurance companies use derivatives to manage duration and asset liability management as well. And then for credit, again, credit risk is a primary risk for banking. But insurance companies may invest in commercial real estate as an area, as an example. So that's relevant as well. And then finally, the whole notion of contingency planning. Being prepared both financially and operationally for disruption and surprises is a principle that applies equally well.  

For private pension plans, the rules around which we operate is slightly different. We're focused more on funding. But again, many of the principles around understanding your risks and understanding the consequences of those risks I think are still of interest and relevance.  

Jing Yang:
Great. So you talk about the 4Cs as your four major priorities. If you were given a chance to choose another additional priority, what would that be? 

Ben Gully:
So I would say that the fifth C, if you will, would be Culture. And one of the observations we have as supervisors is typically culture is a root cause of risk management failings and also successes. How behaviors occur without rules, without supervisors examining and or observing. Managers examining, observing as well how behaviors occur around risk-taking and decision-making will have a very significant influence on the financial outcomes of an institution. 

So for me, the other priority, if I got to add to the list, would very much be culture. 

Jing Yang:
Excellent. You got the bonus point. I was wondering whether you can find a word with a C. Start with C so that’s great. Maybe my last question. Is there anything else that is important for OSFI that I have not asked and that you would like to share with us? 

Ben Gully:
So probably, I mean, there are a range of broader risks that are sort of environmental in nature that we're tackling, and I would point to OSFI’s Annual Risk Outlook or ARO. And they set aside or identify a number of particular risk classes that we're doing work on - such as climate risk is a good example. So I would point you to the ARO for context. And as well, I think as part of our OSFI’S transformation - and the Superintendent launched a blueprint for transformation last year - we're undertaking a renewal of supervision. And renewal, and our mind means making sure our approaches, tools and technology continue to be up to date. And our framework for evaluating risks in our institutions is going to be reviewed and updated next year and launched. And the way we interact with our institutions, I think will evolve to reflect that. We will be giving even more visibility to financial resiliency as well as operational resiliency. And also, an even greater focus on corporate governance and risk management and providing more visibility to the institutions we oversee about our opinions and assessments. And we think that it will promote a richer dialog with the institutions we oversee and ensure that we continue to deliver on OSFI’s mandate of promoting safety and soundness. 

Jing Yang:
Thank you very much. 

[OSFI logo] 

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