Opening remarks by Ben Gully at the DTI risk management seminar
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Document propertiesThank you Jacque and welcome to everyone who is joining us today.
I would like to open today’s seminar by highlighting three areas of focus for OSFI as we transform and refocus to meet ongoing and future challenges.
First, let’s begin with the economic outlook for Canada as we near the end of another trying year. We have been through nearly three years of a global pandemic and are feeling the shockwaves from geopolitical tension in Europe. Inflation is at the highest level in decades, interest rates continue to rise leading to higher debt servicing costs, and the word recession is on many lips.
We know that there will continue to be many challenges ahead. As central banks around the world have tightened their monetary policies against a backdrop of high indebtedness, it has forced borrowers, who have become accustomed to low interest rates for many years, to adjust to a new reality. Sustained efforts to combat inflationary pressures are resulting in a more stressful time for financial institutions and their clientele.
Canada’s financial system remains robust and healthy despite the impact on the economy of high inflation and interest rates. Still, we all need to be extra vigilant and ready to face the challenges ahead.
The second point I would like to touch on is the financial and non-financial risk environment which continues to evolve, providing both opportunities and many uncertainties.
In October, OSFI updated its annual risk outlook for 2022-2023 as the risk environment has shifted amid the economic challenges and the current geopolitical tensions that continue to impact trade and the overall economy.
In terms of financial risks, the housing market downturn has profoundly affected real estate secured lending. Further rate hikes and a house price correction could lead to increased borrower defaults, credit losses and broader housing-led softening of the economy. It will be key that employment remains strong if we are to avoid more widespread concerns in these regards.
The pandemic has changed the way people work and the way they shop, leading to much uncertainty for the commercial real estate market. Witness the rise in commercial spaces for lease in any downtown core.
The potential dangers arising from high amounts of leverage have also been evident from recent episodes affecting institutions like FTX, Archegos, and even large UK pension funds. While these episodes have not touched Canada’s shores in any significant sense, they are reminders of the importance of preserving sound risk management practices and controls on counterparty credit and market-based risks that have the potential to materialize very quickly, and on a large scale.
With respect to non-financial risks, cyber attacks are a top concern both within and outside the financial sector. Well-financed sophisticated actors—some state-sponsored, others with links to organized crime—are employing cutting-edge technology to try to disrupt business and shake public confidence in the financial system.
New advanced technologies, including quantum computing, blockchain and AI, are evolving at a rapid pace. Digital innovation is changing the financial system, presenting opportunities to provide greater customer value but also giving rise to new risks.
Recent events have shown us that digital assets such as cryptocurrencies and stablecoins, while popular, must evolve if they are to become part of the mainstream. Innovations in this area are occurring both within the regulatory system and outside of it, and sometimes both simultaneously. While in their infancy, clearly they call for prudent and thoughtful regulatory approaches.
Climate change is disrupting weather systems as we know them. It is forcing financial institutions, insurers and communities to quickly reevaluate the physical and transition risks that could impact the safety and soundness of individual financial institutions. It is also having broader impacts on financial stability which could become more severe if climate-related risks are not quickly integrated into institutions’ risk management frameworks.
OSFI is seized with these risks, and they require our attention each and every day.
That takes me to the third and final point I would like to speak about – how OSFI is taking action.
When we look at financial risks, OSFI relies on active supervision and ongoing dialogue with supervised institutions to drive action. This includes the ongoing assessment of risk management practices and, related, the monitoring of appropriate margins of safety in capital planning and credit reserving practices in order to maintain resiliency. At the same time, we are updating our supervisory approaches to ensure they remain ‘fit for purpose’.
In concrete terms, that means the supervision of the “4 Cs”: that deposit-taking institutions ensure they have sufficient cash for funding and liquidity; that they have adequate capital to absorb potential shocks; that they ensure that their credit practices for borrowers and counterparties are proactive and prudent; and that they have contingency measures in place to be able to deal with uncertainties.
With respect to non-financial risk, OSFI is working to mitigate risks on several fronts including with appropriate guidelines. For example, Guideline B-13 on technology and cyber risk management, Guideline B-10 on third-party risk management and Guideline B-15 on climate risk management.
We are working to further promote comprehensive and effective technology and cyber risk management practices with OSFI’s upcoming Intelligence-led Cyber Resilience Testing.
Through OSFI’s Blueprint for Transformation we created the Digital Innovation Impact Hub earlier this year. Its goal is to foster innovation in the financial sector, while ensuring OSFI is prepared to regulate and supervise an evolving digital landscape. Last month, we issued our proposed roadmap for an evolving digital landscape and are collaborating on this front with domestic and international regulators.
Today’s sessions will help us to better understand current – and emerging – risks, and better equip us to manage them by ensuring we are open about the risks we face and the expectations we set for deposit-taking institutions in response.
Thank you.