OSFI annual report released: Risk identification and early intervention protecting Canadians

OTTAWA – October 7, 2004 – The annual report of the Office of the Superintendent of Financial Institutions (OSFI) for 2003/04 shows that the financial regulator’s risk mitigating and intervention actions have contributed to continued public confidence in Canada’s financial system and generally strong performance by financial institutions.

“Canadians are fortunate to have one of the strongest, most dynamic and successful financial systems in the world,” states Mr. Le Pan in the report. “While much of the credit must be given to the institutions we regulate, OSFI believes it has also played a key role in contributing to the safety and soundness of the industry and the confidence Canadians express in their institutions.”

Although many Canadian financial institutions have experienced a return to better credit quality and profitability, OSFI continues to identify selected situations where risks assumed by institutions are not matched by the required capability to measure, monitor and manage those risks.

“OSFI will continue to execute its mandate by pursuing effective mechanisms for evaluating and managing risk, programs to promote sound business and financial practices, and the capacity and willingness to intervene early to avoid or minimize potential problems,” adds Mr. Le Pan in his message.

The performance highlights section of the report indicates the property and casualty insurance industry’s operating results improved significantly in the past year with a return on equity of 11.4 percent. The industry’s ratio of expenses to premiums fell below 100 per cent for the first time in two decades. As well, there were fewer pension plans on OSFI’s watch list, with the number dropping throughout the year from a high of 96 to 83.

Although pension plan underfunding is permitted due to the long-term nature of pension investments, OSFI continues to actively monitor and intervene where warranted to protect pension plan members’ benefits. Based on OSFI’s calculation of estimated solvency ratios, approximately 50 per cent of all defined benefit plans supervised by OSFI were underfunded and over half of these were underfunded by more than 10 per cent.

The annual report also notes that asset quality and capital ratios continue to improve at Canadian financial institutions. The average ratio of capital to risk-adjusted assets for banks increased to over 13 per cent at the end of 2003. This ratio is considerably higher than the Bank for International Settlements (BIS) 8 per cent minimum threshold or OSFI’s 10 per cent target for banks. For life insurers, the ratio of actual capital to the minimum requirement was also very strong. Improvements were noted in the composite risk ratings assigned to financial institutions, with approximately 80 per cent of financial institutions assessed by OSFI being assigned a low to moderate composite risk rating, compared to 75 per cent in the previous year. Only 0.3 per cent of institutions were assessed as high risk, down from 1.5 per cent the previous year.

OSFI has also taken steps to update its regulatory framework, such as replacing the Minimum Asset Test with an improved, risk-based Minimum Capital Test, resulting in reduced capital requirements for most property and casualty insurance companies.

OSFI also took action to determine the progress financial institutions have made in developing anti-terrorist financing and anti-money laundering programs. OSFI has now assessed these programs in institutions representing 90 per cent of total industry assets, up from 63 per cent previously. While institutions are devoting considerable resources to these programs, OSFI has identified and communicated a number of areas for improvement.

“Canadian confidence in the safety of money entrusted to financial institutions is high and deservedly so. OSFI is one of the top prudential regulators in the world and we continue to find ways to be even more efficient and effective and balance the need to be vigilant with the need to foster a competitive financial sector,” concluded Mr. Le Pan in his message.

The annual report can be accessed on OSFI’s Web site at the following address: http://www.osfi-bsif.gc.ca/eng/about/reports/index.asp

The Office of the Superintendent of Financial Institutions (OSFI) is the primary regulator of federal financial institutions and federally administered pension plans. OSFI’s mission is to protect the rights and interests of depositors, policyholders, pension-plan members and creditors of financial institutions, and to advance and administer a regulatory framework that contributes to public confidence in a competitive financial system. OSFI supervises and regulates all banks and all federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies and pension plans.