Superintendent Peter Routledge participates in a fireside chat with John Van Boxmeer, Chair of the Canadian Bond Investors’ Association, at the Canadian Bond Investors’ Association Annual Conference

Moderator: John Van Boxmeer:

Can you please start by updating us on your broad priorities?

Superintendent Peter Routledge:

• Heading into 2025, I will be in my second half of my seven-year term and that does change my perspective.
• Canada's economy will change in the coming years because the geopolitical environment is changing. We’ve brought our regulatory frameworks up to the risk environments (in example: cyber risk, third party risk, climate risk guideline, Basel III, IFRS 17). I see the next three years as really cementing constructive changes we made at OSFI and over the last few years.
• We had a mandate change. The government added integrity and security concerns to an equivalent level as financial conditions. We have to finalize what our integrity and security supervision looks like.
• We have a lot of work to do getting our data environment modernized, and we will.
• While we don't want to rush any changes to life insurance capital or to property and casualty insurance capital, it has to be on our minds as well.

Moderator: John Van Boxmeer:

OSFI has tended to be quicker implementing a lot of the Basel changes and it seems like many of OSFI’s peer regulators have slowed and/or reduced capital expectations for the most recent round of Basel changes. By the way, I’m hesitant to buy into calling this the Basel endgame, since changes never seem to stop. First, is endgame the right way to think about this? What do the delays by other countries mean for you? Does OSFI give something back to the banks, even temporarily? Before you answer, remember you are in a room full of bond investors, most of whom are well-served by banks needing to hold capital to better protect our investments.

Superintendent Peter Routledge:

• In 2017, we committed to implementing a series of post-crisis regulatory reforms to the Basel III framework alongside supervisors from the 20 participating jurisdictions. We made this commitment to make the Canadian banking system safer and to signal our willingness to contribute to international financial stability.
• OSFI is a proactive and principles-based regulator. That’s why we were able to move quickly to adopt the rules, and because our financial system is well regulated, well capitalized, has ample liquidity, we move faster. We didn't have to go through some of the legislative process points that some of our peer regulators did. Canada concluded its implementation of Basel III 2017 reforms in early 2024 and established a three-year phase-in of the capital floor.
• Adoption of the 2017 Basel III reforms has been uneven across countries. Other jurisdictions that have taken longer to adopt Basel III, tend to have public rules-based processes that take longer to complete. It will take 3-4 years until some of our peers have an equivalent.
• We will continue to measure implementation progress of the 2017 Basel III reforms across jurisdictions with a focus on both competitive balance in banking and the soundness of Canada’s capital regime. When it comes to global regulations, we'll have to be mindful of the reality and the fact that there are 10 large internationally active financial services companies in Canada that have long competed outside Canada and that will continue to compete outside Canada. We have to balance our approach to supervision and regulation with global standards. So that'll be a very substantial part of what we'll look at over the next few years.

Moderator: John Van Boxmeer:

APRA, the Australian bank regulator recently proposed to eliminate Additional Tier 1 (AT1) instruments from their banks’ capital expectations citing effectiveness of AT1s and, I think, some concerns about retail holdings. In Canada we’ve seen a shift away from the retail listed preferred shares towards still relatively new AT1s, LRCNs and institutional prefs. How do you think of AT1s and is there any risk that the Canadian versions will be phased out similar to our friends down under?

Superintendent Peter Routledge:

• First, I want to reiterate that OSFI’s capital rules intentionally emphasize common equity to reinforce the financial resilience of banks and insurers as to reduce their probability of failure. This means OSFI’s capital expectations will always heavily weight common equity over other forms of regulatory capital.
• AT1 and Tier 2 capital instruments do play an important role in the capital stack, and we continue to be comfortable with these instruments’ loss absorbing capacity.
• It is a cohesive framework for contingent capital for the banking system. And removing one piece of it would mean you'd have to rethink the entire framework.
• We will always consider changes when something isn’t working as intended. But right now, there is no evidence to suggest that such action is warranted in Canada.

Moderator: John Van Boxmeer:

We’ve heard a few things in that last year or more regarding insurance resolution and possible developments regarding insurance company capital instruments. You’ve previously indicated there is a need for improvements to resolution tools for insurance companies, you also clarified that you weren’t thinking of capital instrument design when you made those comments. Separately though, we know there is a footnote in the insurance capital guideline indicating OSFI might consider NVCC or bail-in like requirements in the future. We’ve also heard the idea of bail-in features being considered for insurance companies in other jurisdictions. I personally don’t think that the rationale for NVCC with banks extends well to insurance companies, but where does OSFI stand on these topics, what resolution tools need improvement and is OSFI considering NVCC or bail-in requirements in capital instrument?

Superintendent Peter Routledge:

• Fundamentally, our mandate is to protect depositors, creditors, and policyholders from undue losses. We do this by working to preserve confidence in the Canadian financial system. Since the global financial crisis, we have learned that any financial institution can disrupt financial stability under the right conditions regardless of its size, complexity, footprint, or business activities. This is true of both banks and insurers.
• As a proactive regulator, we recognize the urgency of getting ahead of these challenges. 2024 has been Canada's most expensive year for catastrophic losses on record. While federally regulated property and casualty insurers have, to date, been able to manage the financial cost of the most likely natural disasters, we have an opportunity to refine our insurance resolution framework so that it can help manage through a scenario in which extraordinary insured losses arise from large-scale catastrophes.
• In Canada, the existing insurance resolution framework has successfully navigated the very few insurance insolvencies that have occurred over the last 30 years. But gaps remain despite - particularly in terms of the rising scale of potential events.
• At this point, I can’t say whether NVCC and bail-in will be the right tools to resolve failing insurers. OSFI and our federal partners still need to explore these and other contingency measures. I do believe, however, that it’s important that we have a broad arsenal of tools at our disposal to bolster insurers’ resilience to future crises - and to protect financial stability. 

Moderator: John Van Boxmeer:

There have been examples of major AML control lapses. How does OSFI manage the supervision and work with FINTRAC, particularly when problems occur like those which recently surfaced with TD?

Superintendent Peter Routledge:

• I’m not able to provide specifics about a particular institution, but I can speak to you about our expectations for the financial institutions we regulate. The Government of Canada gave us an integrity and security mandate to make sure institutions have in place policies and procedures to protect themselves against threats to their integrity and security, including foreign interference.
• If you're a board member of a bank or a senior executive, you're operating in an environment, there are threat actors that will attack your institution in that way. When you're under attack, the best line of defense is to set up defenses and so invest to protect the security and integrity of your institution from AML. And that's your job as an institution.
• In terms of our job, it is to supervise institutions to make sure that they do manage this risk. And so the way we will do that is to work more closely with Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), with law enforcement authorities here in Canada in order to identify where there may be weaknesses at an institution and use our supervisory tools to address those weaknesses.
• Deficiencies in any institution’s anti-money laundering regime are a prudential risk. They can be illustrative of how non-financial risks can manifest as material financial risks.