Momentum 2024, Central 1’s Annual Conference fireside chat Q&A with Central 1 CEO Sheila Vokey

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On October 29, 2024, Assistant Superintendent Tolga Yalkin represented OSFI at Central 1’s Momentum 2024 conference in Toronto. The session focused on current risks, regulatory strategies, and the evolution of federal continuance, reflecting OSFI’s commitment to transparency and effective oversight.

Key topics

1. Financial Sector Risks: Tolga began by highlighting the top risks identified in OSFI’s recent Semi-Annual Risk Outlook (SARO):

• Residential Mortgage Risks: Despite recent rate increases, mortgage delinquencies remain below historic norms. However, for financial institutions, rising rates could eventually lead to higher defaults, impacting credit quality, capital adequacy, and overall financial stability.
• Wholesale Credit Risks: These risks are elevated due to fluctuating credit conditions, which pose challenges for financial institutions in managing concentration risks, containing credit losses, and maintaining stable funding amidst economic shifts.
• Liquidity and Funding Risks: Economic uncertainty can restrict access to funding, raise costs, and weaken liquidity buffers. This impacts financial institutions' ability to meet short-term obligations and maintain compliance with liquidity requirements like the LCR.
• Integrity and Security Risks: Cyber threats, third-party vulnerabilities, and operational disruptions can compromise a financial institution's resilience, leading to compliance failures, operational disruptions, and reputational damage if not effectively managed.

OSFI’s decision to transparently disclose its views on these risks is part of its broader strategy to maintain trust, encourage proactive risk management, and ensure that institutions can align their strategies with OSFI’s expectations. By sharing these risks publicly, OSFI aims to foster awareness and collaboration, supporting more resilient financial institutions.

2. Regulatory Reboot Initiative: Tolga provided insights into OSFI’s regulatory reboot initiative, which is designed to enhance focus on the most critical risks while reducing unnecessary regulatory complexity. The new approach centers on quarterly releases of guidelines, which will follow a consistent schedule. Each release will feature guidelines for consultation—open for three months until the subsequent quarterly release—and finalized guidelines for implementation.

At the upcoming quarterly release on November 21, 2024, OSFI will announce a series of guidelines and advisories that will be decommissioned, effective April 1, 2025. This marks the first wave of a broader housekeeping exercise aimed at streamlining the regulatory framework.

Tolga emphasized that OSFI is not only focusing on the number of guidelines but also on their volume and type (e.g., financial versus non-financial) to ensure a more manageable implementation process for institutions. This approach aims to smooth the regulatory burden over time, with more refinements to come.

As part of the regulatory reboot, OSFI has made significant efforts to ensure that the guidelines it releases are clear and concise. The final version of Guideline E-21 on Operational Risk and Resilience exemplifies this approach, with simplified language and streamlined content, making it easier for institutions to understand and implement.

From OSFI’s perspective, brevity is critical for the industry because it reduces the risk of misinterpretation, supports more efficient compliance, and allows institutions to focus on practical risk management rather than navigating overly complex regulations.

In short, clear, brief guidelines enable better decision-making and quicker adaptation to evolving risks.

3. Top-of-the-House Risk Management Guideline: Tolga talked about the anticipated Top-of-the-House Risk Management Guideline, set for release in 2025/26, which will promote a comprehensive approach to risk management across institutions. This guideline will aim to avoid ad hoc responses to emerging risks by establishing a consistent framework for managing broad categories of risk. It is designed to enhance regulatory discipline, providing institutions with clear expectations that support more effective, holistic risk management.

4. Accountability Guideline: Similar to the Risk Management Guideline, Tolga talked about the scheduled update in 2025/26 of a new Accountability Guideline, which will replace the existing Corporate Governance Guideline. This updated approach will place a stronger emphasis on the individual and collective responsibilities of directors and officers, reflecting OSFI’s focus on governance, accountability, and prudent oversight. The guideline aims to clarify governance expectations, promoting a more effective accountability structure within financial institutions.

5. Balancing Effective Competition and Regulation: OSFI’s regulatory approach is guided by the need to ensure that financial institutions can compete effectively and take reasonable risks, as mandated by the OSFI Act. This principle consistently shapes the development of new regulations, as OSFI carefully considers competitive dynamics both in Canada and internationally.

For example, Canadian banks operating overseas face peers subject to different regulatory requirements, which can impact competitiveness. Domestically, OSFI is also mindful of the balance between large institutions (D-SIBs) and smaller financial entities, aiming to foster a competitive environment that allows smaller institutions to operate effectively alongside larger banks.

This balance recently influenced OSFI’s decision to pause the implementation of the Basel III output floor for D-SIBs, aligning with delays by other international jurisdictions. OSFI is aware of potential knock-on effects of changes such as this for the domestic market. In particular, it is looking at the impacts on small and medium-sized Canadian banks, which primarily use the standardized approach and could face relative competitive disadvantages.

Tolga noted that while this work is important, it continues to move OSFI toward a “made in Canada” regulatory approach, which adds complexity and workload, raising the question of resourcing. Given this, OSFI must prioritize where it invests its regulatory resources, ensuring that its actions are both effective and feasible while still enabling a competitive and resilient financial sector.

5. Federal Continuance: Tolga highlighted federal continuance as a critical component for a diverse financial system, providing credit unions with the option to transition to a federal charter where appropriate. He encouraged early planning to address transitional challenges, such as liquidity support, deposit insurance changes, and risk management gaps. Tolga emphasized that interpretations of OSFI’s expectations might differ from provincial regulators’ views, making proactive engagement essential. He also expressed OSFI’s commitment to fostering direct collaboration with provincial regulators, ensuring a smoother continuance process.

The session received positive feedback, with participants appreciating OSFI’s efforts to enhance predictability, transparency, and risk-focused regulatory management.