Tolga Yalkin, Assistant Superintendent, delivers remarks for OSFI’s second Quarterly Release Announcement Day

Check against delivery

Before I begin, I’d like to acknowledge that I am speaking to you from Ottawa on land that has served, for time immemorial, as a meeting place amongst Indigenous peoples, including the Algonquin Anishinaabeg people. I am grateful to be present in this territory.  

I’d like to welcome everyone to OSFI’s second Quarterly Release Announcement day.

Before I get into today’s announcements, I want to take a moment to acknowledge some news that was shared earlier this week that I’ll be leaving OSFI to take on the role of CEO at the BC Financial Services Authority.

I’m excited about the opportunity ahead and the chance to take on this new challenge, but it’s also difficult to step away from an organization and mandate that have meant so much to me.

Before I move on, I want to underscore the key role the media plays in our financial system. By helping Canadians understand complex regulatory issues—like the transparent releases we’re sharing today—you support public accountability and transparency. This role has been and will continue to remain critical in ensuring trust in our institutions.

Now, with that, let me turn to matters at hand. I hope you’ll bear with me, as I have about 15 minutes or so of prepared remarks and am also a little under the weather, so I apologize in advance if my voice falters at any point.

First, I want to thank those of you who joined for our last Quarterly Release Announcement and provided feedback. What we heard was very positive and constructive and reinforced for us that holding these releases adds value for our stakeholders in that it allows us to be clear on what OSFI is doing and what we intend to do.

Today, I have a few releases to announce. While—as I think I had mentioned previously—back in the ARO in the spring, we outlined those guidelines we would be releasing each quarter.

We did our best to keep it to four to make sure we were doing our part to smooth regulatory burden over the cycle. Consistent with this, when we released the ARO back in the spring, we identified four guidelines, all of which we are announcing today:

• The final Liquidity Adequacy Requirements Guideline or LAR for short.
• The final Mortgage Insurer Capital Adequacy Test Guideline or MICAT for short.
• The final Life Insurance Capital Adequacy Test Guideline or LICAT for short.
• A Regulatory Notice on Culture Risk.

Since the spring, a few things have changed.

First, based on the feedback we got on the draft Culture and Behaviour Risk Guideline, we decided to change course.

Rather than issuing a final guideline, we are issuing a slimmed down and temporary Regulatory Notice on Culture.

While we remain increasingly convinced of the important role culture plays in financial institutions, including with respect to risk taking, we came to the view, based on the feedback we received and careful reflection, that culture is something better embedded into other existing guidelines, which are sometimes reviewed.

So, today, we are issuing a regulatory notice, which, though effective immediately, will be temporary in nature, until we are able to embed the expectations in it in other guidelines.

Which guidelines will those be? Well, there are two in particular.

First, as I’ve mentioned in other venues, next fiscal year, that is, at some point, between April 1, 2025, and March 31, 2026, we will be introducing a top-of-the-house risk management guideline.

This guideline will set high level expectations as to how risk should be managed, broadly speaking.

My hope is that this guideline will provide useful guidance to financial institutions on how they should manage risks, more generally, but especially in the face of emerging risks, avoiding for us, as well, as a regulator, the pressure to bring in specific guidelines for every new risk.

Expectations around culture will be embedded in this guideline, and you’ll see that when we consult on it.

Second, we will, also in next fiscal year, be consulting on a revamped Corporate Governance Guideline, which we are going to restyle our Accountability Guideline.

There too, you’ll see culture figure prominently, given the critical role that directors and officers play in setting the tone for the organizations they are responsible for.

For what it’s worth, I think, and I hope you’ll agree, that embedding culture expectations in this way makes perfect sense: The three areas of focus in the regulatory notice—governance of culture risk, fostering a desired culture, and enterprise-wide culture management—lend themselves well to a lift and shift into these two guidelines.

In addition to this change, around culture, we found ourselves needing to add slightly to the release today, which I think makes sense, for as we get further and further into our fiscal year, risks naturally evolve.

While the regulatory notice is a temporary measure, it constitutes formal guidance until we do all of this.

Moving on, we have a couple pieces of guidance we are releasing today that weren’t highlighted in the ARO in the spring:

• First, a Revised Regulatory Notice on Commercial Real Estate or CRE Lending.
• And second, the final International Financial Reporting Standard—or IFRS—17 Guideline, as it is more commonly referred to.

The need for these updates only became apparent to us after the ARO was issued in the spring, hence the fact that they don’t appear in the scheduled annexed to that report.

There are a few key things you should take note of that we are updating in the CRE Regulatory Notice we issued in September of 2023 …

The notice has been updated to reinforce our expectations around forbearance practices for CRE lending.

Forbearance refers to concessions granted to a borrower because of temporary financial difficulty.

While we recognize the importance of institutions working constructively with CRE borrowers, forbearance should not be used to mask or delay taking necessary actions to mitigate credit risk. This undesirable practice is often referred to in the business as “extend-and-pretend.”

It won’t surprise you that we expect forbearance measures to align with the institution’s risk appetite. And as such,  financial institutions would we well served to evaluate their use of forbearance carefully to ensure appropriate provisioning and capital treatment.

This updated notice takes effect immediately.

As for IFRS 17, many of you will know, it covers accounting expectations for companies that issue insurance contracts.

Similar to the CRE Regulatory Notice, we realized after the ARO was published that we needed to provide clarification on some specific products and certain transactions and address concerns some of you—our stakeholders—had identified through our ongoing engagement.

Our IFRS 17 Guideline formalizes interim expectations previously outlined in the IFRS 17 Advisory, letters to insurers, and regulatory return instructions. It introduces no substantive changes but provides clarity on existing practices, including financial guarantees, intra-group pooling, and captive fronting arrangements. This ensures consistent application while concluding OSFI’s IFRS 17 transition project.

As I mentioned, as well, there were three guidelines that I haven’t touched on yet that we did indicate we would be issuing at this Quarterly Release, namely LAR, LICAT, and MICAT. I’ll talk about each of those briefly.

The final LAR Guideline makes changes to the monitoring tools used to address intraday liquidity risk, which is the risk that on a given day a bank will be unable to meet a payment obligation at the time expected.

The changes will help us determine how well institutions are managing their intraday liquidity risk.

Moving on, our LICAT guideline helps us assess an insurer’s financial health and, in doing so, helps protects policyholders and creditors.

Updates to the LICAT guideline include important changes to the segregated fund guarantee risk section and minor edits to other sections.

The proposed change shifts from factored-based or internal model approaches to a standardized approach where insurers apply OSFI-prescribed shocks to IFRS 17 models, with a simplified option available for insurers with small, seg fund portfolios.

Moving on to the next item, the main change in the final MICAT Guideline is to the capital rules for multi-unit residential mortgage insurance risk—buildings with six units or more. We hope that this change will ensure that the housing market remains stable, supporting affordable access to homes for Canadians.

In addition to the guidelines we are releasing today, we are also making a few other announcements.

While not new guidelines per se, we realized, through the feedback we received from many of you, that these Quarterly Announcements were great opportunities not just to issue guidelines but also transmit key policy shifts we are making as an office.

So, I have a few additional announcements to make.

First, many of you may be familiar with our Minimum Qualifying Rate or MQR.

In a nutshell, instead of just using the actual interest rate a borrower would pay, we ask lenders to calculate if a borrower could afford payments at a higher rate—at 2% more than the actual rate or 5.25%, whichever is higher.

If you can handle payments at this minimum qualifying rate, you pass the test. This gives the lender confidence that, if rates go up, you’d still be able to afford your mortgage.

This said, when a borrower is renewing their mortgage—with no changes to the amortization period or loan amount, they don’t have to requalify using the MQR.

This makes sense given the lender has already assessed and assumed the risk when the mortgage was originated.

The tricky part comes if the borrower wants to switch lenders. If a borrower is switching from one lender to another, they technically need to requalify using the MQR.

In principle, this makes sense, as for the new lender, this is a new loan, which they would want to stress to make sure they are adequately assessing and accounting for risk.

But one can immediately see how it may lock some borrowers into their current lender … and, in a sense, make it impossible for some of the most vulnerable homeowners to find a better deal elsewhere.

That’s why we’ve decided today to relax the expectation that the MQR be applied for what we call straight switches.

More specifically, we will no longer be expecting the application of our MQR where a borrower is switching from one federally regulated lender to another, so long as the amortization period and the loan amount are not increased.

This doesn’t mean lenders won’t apply any stress test. In fact, they have to apply a stress test to calculate debt serviceability measures like GDS and TDS. It just means that it’ll be up to them, based on general principles of sound mortgage underwriting, including in our Guideline B-20, to determine what stress test is appropriate.

A second announcement I would like to share today is on our Policy Review.

Some of you may have heard me talk about this before. In fact, this approach to Quarterly Releases is part of our Policy Review initiative.

But a key, additional part of it is a stem-to-stern review we have completed of our existing guidelines and advisories.

We looked at our full suite of guidance, and determined whether each guideline was still necessary, and if they were still focused on the current critical risks.

Today, I am announcing the rescinding of 20 guidelines and advisories that are outdated, redundant, or no longer fit-for-purpose. This rescinding will be effective by April 1st, 2025. The full list of those that are going the way of the dodo can be found on our website.

While an important step forward for us, this is not the last chapter of our Policy Review initiative. In fact, we identified a number of guidelines that may be good candidates for recission, but that would likely require further adjustment to our policy framework before doing so. When we’re ready, we’ll be taking steps in this direction, consulting with stakeholders.

Some of you may note that there was no consultation on this 20 that we are announcing today. That was by design. While we always like to consult, we wanted to move as quickly as possible to clear out the low hanging fruit. Rest assured that for subsequent waves, we will reach out to you for your thoughts and perspectives. 

That brings me to the end of this quarter’s announcements.