Tolga Yalkin participates in the 2024 Institute of International Finance-Canadian Bankers Association Canada Forum

Moderator:

Why do regulators support the development of international standards?

Assistant Superintendent Tolga Yalkin:

• There are many benefits to working with international standard setters in the development of regulatory requirements for financial institutions.
• For example, alignment with international standards supports compliance for financial institutions operating across national boundaries.
• This said, it’s important to note that international standard setters usually focus on internationally active financial institutions, with the focus on promoting a level playing field internationally as well as maintaining global financial stability.
• Thus, while international standards can be a force multiplier for regulators when developing what can often be complex and detailed guidelines, they do not come without their limitations.
• Some standards may not be appropriate for small, domestic players and national authorities need to recognize this, as we did in the Small and Medium-Sized Bank carve out in our Capital Adequacy Requirements Guideline.
• International standard setting can also struggle with newer risks that are less well-defined and change more rapidly, compared for example to classic financial risks such as leverage.

Moderator:

Has the degree of alignment of domestic regulators with international standards been changing as of late?

Assistant Superintendent Tolga Yalkin:

• While regulatory alignment between jurisdictions is not and has, in the past, rarely been perfect, international standards create a degree of commonality between countries. In some cases, we have seen increasing alignment and convergence; in others, we have seen differences emerge.
• For example, in the case of climate risk management, we have observed convergence of disclosure frameworks relating to emissions. While questions remain about when requirements should come into effect and how emissions should be calculated, the overarching framework of scope 1, 2 and 3 emissions has endured.
• In the case of the Basel III Endgame, as it is often called, while we have seen some convergence, we have also seen some delays in implementation and jurisdictional adjustments.
• Adjustments like those associated with the Basel III Endgame implementation are a natural part of the adoption of international standards. While international alignment supports financial institutions in operating across jurisdictions, at the end of the day, each jurisdiction needs to ask itself whether the proposed approach is consistent with the prevailing risks its financial sector faces and the mandate it has been given by its government.
• All this said, some may argue that the increasing codification of non-financial risks into international standards has exacerbated this tension. While financial risks and standards associated with them can certainly provoke controversy, the debate over how non-financial risks ought to be treated can sometimes be even more of a flashpoint.  

Moderator:

How does international standard development serve as a “force multiplier” for regulators?

Assistant Superintendent Tolga Yalkin:

• The financial sector is complex, and the risks that need to be managed continue to grow and evolve. Added to this is the fact that the approaches to manage those risks also require a high degree of expertise and effort to work through and to implement in day-to-day supervision.
• Naturally, regulators around the globe have limited resources, and need to figure out how to maximize their impact. The development of international standards is one way to leverage the expertise of other jurisdictions towards a common goal.
• By working together, distributing work and analysis, thinking through problems, and proposing approaches, they can develop a more complete and comprehensive solution than would be possible otherwise.
• Thus, OSFI works collaboratively with other regulators in the development of international standards. This said, this does not mean that OSFI is a passive taker when it comes to international standards:
  • First, our active participation allows us to influence their content, in line with our own views on how those standards should take shape.
  • Second, once an international standard has been developed, we take a step back and ask ourselves whether or not it is fit for purpose for Canada. We implement only those aspects that make sense from a Canadian perspective.

Moderator:

What do regulators think about when considering the adoption of international standards?

Assistant Superintendent Tolga Yalkin:

• OSFI seeks to engage on those international standards that are relevant to our industries, their products, and the risks that they are facing, as well as on standards that help establish and maintain a sound foundation for international parent companies either already operating or seeking to operate in Canada.
• OSFI collaborates extensively with international standard-setting bodies such as the Basel Committee on Banking Supervision (BCBS), the Financial Stability Board (FSB), and the International Association of Insurance Supervisors (IAIS).
• In these collaborations, we seek to reflect our Canadian perspective in these international standards. In other words, we work to influence the development of standards such that they represent an appropriate response to the underlying risk, based on our experience and perspective.
• Once an international standard has been developed, prior to incorporating it into our own expectations, we carefully examine it and ask ourselves questions about whether it and all of its components are relevant from our perspective, whether there are any gaps it fails to address, and whether there are any adaptations that we might consider.
• A good example of this again relates to climate risk. While, broadly speaking, we followed international developments in crafting our expectations in Guideline B-15, we recognized that certain expectations were either not particularly relevant to Canadian financial institutions and should therefore be omitted, or that the detail that they would require was not justified given the risks faced by Canadian financial institutions.
• Consequently, we included a slimmed down set of expectations in our Guideline B-15 and expressly provided for additional flexibility to financial institutions aligning with it.

Moderator:

What role does international alignment play in supervision as opposed to regulation?

Assistant Superintendent Tolga Yalkin:

• While we often focus on international regulatory alignment, ultimately regulation needs to be implemented by supervisors. Thus, international alignment is affected, not just by the expectations that we set, but also by how we go about supervising according to them.
• International standards are an essential tool in facilitating collaborations between Canadian supervisors and so-called host-country supervisors. Having a common framework of understanding about risk exposure, risk management and corporate governance can assist in intelligence gathering and taking prompt corrective measures.
• OSFI’s supervision uses methods and risk skills that reflect good practices across the regulatory community. Our supervisory approach is aligned with international standards, such as the Basel Committee’s ‘Core Principles for Effective Banking Supervision’ and the ‘Insurance Core Principles’ established by the International Association of Insurance Supervisors.
• While these methods lay the foundation for effective supervision, the key is the supervisor’s judgement about the risk and what to do about it. Prudential supervision is a complex and nuanced discipline that relies heavily on strategy and skill.
• To this end, we co-chair the Basel Committee’s Supervisory Cooperation Group. This group leads the Committee's work on strengthening supervision of banks worldwide and promoting strong and effective supervisory cooperation on cross-border banking issues. When issues do arise with financial institutions that operate internationally, we work closely with supervisory colleges, consisting of home and host jurisdiction regulators, to ensure that approaches taken are coherent and aligned.

Moderator:

How does OSFI factor in competition when it comes to the adoption of international standards?

Assistant Superintendent Tolga Yalkin:

• Part of our job as a regulator is to balance our regulatory approach with due regard to the need for financial institutions to compete effectively and take reasonable risks. So, whenever we're considering a new guideline or a new expectation, we think about whether it strikes that right balance.
• We look at these standards and ask ourselves what makes sense from a Canadian perspective. In doing this, we carefully consider the risk we think the international standard addresses, but also how it would impact the ability of financial institutions to compete effectively.
• These discussions also happen at the international level. For example, at our supervisory colleges, we talk about our regulations and supervision and how our approach facilitates financial institutions’ competitiveness. These levels of engagement help banks operating in other jurisdictions.

Moderator:

Does proportionality play a role in the implementation of international standards?

Assistant Superintendent Tolga Yalkin:

• Proportionality plays a role in the implementation of most of our expectations, whether they stem from international standards or otherwise.
• Each financial institution is unique. Things like the size, the complexity, and the location of operations of financial institutions can significantly change the nature of the risks that they face. And it’s particularly for that reason that we often state expressly in our guidelines that they're intended to be applied in a proportional manner.
• The application of proportionality typically comes when we're supervising financial institutions. So, the expectations—some of them that can be relatively high level—allow a significant margin of maneuver for supervisors to determine what would be the proportional application of them in any given context, depending on the specific circumstances of the financial institution.
• This said, it can also come in the form of regulation: A good example of this is the Small and Medium-Sized Bank carve-out in the Capital Adequacy Requirements Guideline that also reflects local adaptation of an international standard.
• While expressing proportionality in our regulations can make sense, doing so involves navigating an ongoing tension between precision, on the one hand, and the desire for flexibility, on the other.

Moderator:

Is OSFI reconsidering its approach to model risk given developments in the context of pillar two?

Assistant Superintendent Tolga Yalkin:

• Earlier this year (2024), we consulted on revisions to Guideline E-23 Model Risk Management. These proposed revisions are intended to help us keep pace with the rapidly evolving modeling landscape. They are also designed to broaden:
  • the scope of application to all federally regulated financial institutions and federally regulated private pension plans.
  • the ‘in-scope models’ beyond those in the current version of E-23.
• In the context of pillar two, the current E-23 Guideline already establishes expectations regarding the use of models for an institution’s internal capital adequacy assessment process (ICAAP).
• The proposed revisions to E-23 are not intended to diminish or alter our expectations or our approach to model risk in the context of pillar two.

Moderator:

Can you give us some insights on the approval process for models?

Assistant Superintendent Tolga Yalkin:

• The principles and processes for the assessment of internal models used for regulatory capital purposes are outlined in the Capital Model Assessment Program, or CMAP.
• The requirements outlined in CMAP are designed to ensure that institutions establish models that meet the requirements articulated in the CAR Guideline, relevant Implementation Notes and Guideline E-23 at the onset and on an ongoing basis.
• OSFI’s service window recognizes the importance of application decisions to institutions’ capital planning. The service window to return an application decision is 6 months for new model applications and 3 months for a material model modification.
• However, this depends on the complexity of the application and the quality and comprehensiveness of the submitted documentation.