The Importance of Managing Risk: OSFI Annual Report 2009-2010

Oct., 2010 – Canada’s economy, and its financial sector in particular, withstood the shocks of global financial turmoil better than many of its G-20 partners did. This country’s more positive experience has been attributed to a range of factors, including better risk management by the institutions themselves, and strong regulation and supervision by OSFI.

But continued prudence is required because we are not back to a normal state. While economic indicators were encouraging heading into 2010, by April, concerns were emerging about sovereign debt and global economic growth. It is difficult to gauge at time of writing what the impact might be on the nascent economic recovery.

All of the above is encompassed in the theme of this annual report — The Importance of Managing Risk. Canadian financial institutions have done a good job of managing risk but the bar is constantly rising. Because Canada fared better than other countries during 2008 and 2009, there is a risk that players (including OSFI itself) could become complacent and think the current rules, and the way that risk is managed, are sufficient. One of the ways OSFI manages this risk is by watching and learning from what other regulators have been doing in response to the financial turmoil. For example, in tandem with other regulators, in 2009–2010, OSFI significantly increased its focus on stress testing and began to place more emphasis on corporate governance of financial institutions, as boards are a key control on risk appetite.

We also continue to place emphasis on system-wide reviews of risk areas in banks. In 2009–2010, OSFI did a number of reviews, including liquidity management, compensation, credit cards, US home equity lines of credit (HELOC), Alt-A mortgages, securitization, derivatives collateral management, and stress testing. These reviews help OSFI, and financial institutions, identify where the strengths and weaknesses are across the sector.

The Canadian experience demonstrates that this type of day-to-day supervisory oversight of financial institutions is extremely important, and as important as having robust rules. A financial sector with strong regulatory rules but weak supervisory oversight can be neither safe nor sound. There is growing acceptance of this fact internationally.

As part of ensuring strong regulatory rules are in place, OSFI took an active role in international forums developing such rules throughout 2009–2010. Canadian financial institutions have clearly communicated to us the importance they place on OSFI’s participation in such forums. In the wake of government interventions, which included bank bailouts in many countries, vigorous international debates are underway regarding what kind of rule changes are required. This work is being conducted under the leadership of the G-20 group of countries, with particular work streams led by the Basel Committee on Banking Supervision (BCBS), and the Financial Stability Board (FSB). The pace and extent of the review underway required OSFI to significantly escalate its work in this area.

The BCBS, which is the focal point for developing new global capital and liquidity rules for banks, released proposals in December 2009 for comment. It is anticipated that new rules will be announced by year-end 2010 for implementation by the end of 2012. The BCBS will also consider appropriate transition and grandfathering arrangements. We have been urging that as much attention be paid to supervision as to the new capital and liquidity rules. Indeed, stricter rules, such as substantially higher capital requirements, can create a false sense of security — an institution will never have enough capital if there are material flaws in its risk management practices.

In 2009–2010, OSFI developed additional ways to promote robust risk management practices at financial institutions and pension plans. We held risk management seminars for deposit-taking institutions, life insurance companies, and property and casualty insurance companies. We also held the first of what will be an annual forum for private pension plan administrators. Feedback from participants at all these events was positive and indicated a desire that they continue. We continued to deepen supervisory colleges, including having a focus on “living wills” (contingency plans and resolution plans by financial institutions), and participated in international supervisory colleges organized by other regulators. Partnerships are also central to our effective functioning and management of risk. This past year, we continued to work closely with the Financial Institutions Supervisory Committee (FISC ) on matters relating to the supervision of federally regulated financial institutions (FISC partners include OSFI , the Department of Finance, the Bank of Canada, the Canada Deposit Insurance Corporation, and the Financial Consumer Agency of Canada).

During the year under review, we welcomed Mark White to OSFI ‘s Executive Committee in his new role of Assistant Superintendent, Regulation Sector. Mark joined OSFI in 2008 as Senior Director, Capital Division, bringing with him a wide range of experience in national and international banking, law and finance. Mark replaced Bob Hanna, a long-serving public servant and a key contributor to OSFI ‘s success over the years.

As always, our people are the most important element of OSFI ‘s success. It is their experience and critical judgement that allow us to fulfill our mandate and respond to increased pressure and workloads due to the current challenging economic environment. I extend a sincere thank you to all employees for their continuing hard work and demonstration of commitment to OSFI ‘s values: professionalism, integrity and respect for people. Together, we will continue to learn and improve as an organization, and to contribute to the safety and soundness of Canada’s financial system.

To see the complete report, go here.

About OSFI

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