The Regulation of Financial
Institutions in Canada:
OSFI’s Role and Post-Crisis
Policy Issues
Economics Student Association
University of Ottawa
March 4, 2013
Vlasios Melessanakis
Director, Policy Development
Agenda
• OSFI mandate, structure and approach
• Post-crisis policy issues
• Final thoughts
2
OSFI Mandate, Structure and
Approach
3
OSFI Mandate
• OSFI established in 1987 following two
bank failures in Western Canada
– Independent agency that reports to the Minister of
Finance
– Funded through assessments on the industry and
a user-pay program for select services
• Mandate to protect depositors and
policyholders, and to contribute to public
confidence in the Canadian financial
system
– Not market conduct
4
OSFI Organizational Structure
• Approximately 600 employees in Ottawa,
Toronto, Montreal and Vancouver
Regulation Sector
(rule-making,
approvals,
international)
Supervision Sector
(monitoring,
assessing,
intervening)
Corporate Sector
(human resources,
finance,
communications, IT)
5
Federally-Regulated Financial
Institutions
Financial Institutions
Number
Banks
76
Trust/loan companies
68
Insurance companies
264
Cooperative Credit/Retail
Associations
7
Pension Plans
1,354
6
Regulatory and Supervisory Approach
• Regulation
– Legislation (Bank Act, etc.), guidance, advisories and
rulings
– Approvals (Superintendent and Ministerial)
• OSFI Supervisory Framework
– Early intervention supported by formal tools (prudential
agreement, directive of compliance, capital order, etc.)
– Risk-focussed, on a consolidated basis
• OSFI/CDIC Guide to Intervention for deposittaking institutions
– “Staging” system with escalating monitoring and
interventions by OSFI and the Canada Deposit
Insurance Corporation (CDIC)
7
Financial Institutions Supervisory
Committee (FISC)
• Chaired by the Superintendent of Financial
Institutions
• Other members: Bank of Canada Governor, Deputy
Minister of Finance, CDIC Chair and Financial
Consumer Agency of Canada (FCAC)
Commissioner
• Meets at least quarterly
• Facilitates discussion and exchange of information
related to the supervision of financial institutions
– Critical mechanism for resolution/crisis situation
• Final decisions rest with the respective agencies
8
Other Coordination Mechanisms
• Senior Advisory Committee (SAC)
– Chaired by Department of Finance
– Discussion forum for broad financial sector policy
issues (including macro-financial vulnerabilities)
• Heads of Agencies Committee
– Chaired by the Bank of Canada
– Includes 4 provincial securities regulators (Ont.,
B.C., Que., Alberta)
– Discussion forum for capital market
developments
• CDIC Board
9
International Organizations
Standard-Setting Bodies
• Basel Committee for Banking Supervision
(BCBS)
• International Association for Insurance
Supervisors (IAIS)
Coordinators/Others
• Financial Stability Board (FSB)
• Joint Forum on Financial Conglomerates
• Senior Supervisors Group (SSG)
• International Accounting Standards Board
(IASB)
10
Post-Crisis Policy Issues
11
Global Financial Crisis (2008 – )
12
Real Economy Effects – U.S.
Employment
13
Key Financial Sector Policy Themes
“We are committed to design and implement a system where we
have the powers and tools to restructure or resolve all types of
financial institutions in crisis, without taxpayers ultimately bearing
the burden…” (G20, Toronto, June 2010)
• Capital and liquidity requirements
• Systemically-important banks
• Mortgage underwriting
• Shadow banking
• Corporate governance
14
Aside: Banking vs. Insurance
• A debate as to whether insurance should
be targeted to the same degree as banking
– The AIG failure was the result of its banking
operations
• BCBS far more advanced in their reforms
relative to the IAIS
• Nonetheless, the IAIS is bolstering its
efforts for common insurance standards
– Common Framework for the Supervision of
Internationally-Active Insurance Groups
(“ComFrame”)
15
Bank Capital Requirements
• “Basel III” focus on core tier 1 capital
(or common equity)
Common equity (% of Risk-Weighted Assets)
Minimum
4.5%
Conservation buffer (cannot pay
dividends and bonuses if below)
2.5%
Systemic buffer
0-2.5%
Counter-cyclical buffer
0-2.5%
16
Bank Capital Requirements (Cont.)
• OSFI’s revised Capital Adequacy
Requirements (CAR) Guideline
published in December 2012
– In effect January 2013
• Canadian banks’ common equity capital
has increased by 77%, or approximately
$72 billion since the 2008 crisis
• Already meet Basel III capital
requirements six full years ahead of
schedule
17
Bank Liquidity Requirements
• Basel III creates first-ever international
liquidity standards
• Liquidity coverage ratio (LCR)
– Under specified stress scenario, liquidity for a 30day survival period
• Net stable funding ratio (NSFR)
– Minimum requirements for longer-term, more
stable funding sources
18
Systemically-Important Banks (SIBs)
• Identification of SIBs
– FSB has tasked BCBS to identify SIBs
– 28 global SIBs identified in 2012 based on five
criteria
• Size
• Interconnectedness
• Substitutability/infrastructure
• Cross-jurisdictional activity
• Complexity
– No Canadian banks… yet
– Global SIBs vs. domestic SIBs
19
List of Global SIBs
Bank of America
Citigroup
New York Mellon
Goldman Sachs
JP Morgan Chase
Morgan Stanley
Wells Fargo
State Street
Royal Bank of Scotland
Standard Chartered
Barclay’s
HSBC
BNP Paribas
Groupe BPCE
Societe Generale
Credit Agricole
Deutsche Bank
Unicredit
UBS
Credit Suisse
BBVA
ING
Santander
Nordea
Mitsubishi UFJ
Mizuho
Sumitomo Mitsui
Bank of China
20
Regulatory and Supervisory
Requirements for SIBs
• Adequacy of capital (Basel III)
– Systemic buffer applied to SIBs (1-2.5% CTE)
• Supervisory intensity and effectiveness
• Resolution of SIBs
– FSB Key Attributes of Effective Resolution
Regimes (July 2011)
– Recovery and resolution plans (or “living wills”)
– Bridge bank vs. bail-in as alternatives to bail-outs
– Cross-jurisdictional cooperation
21
Mortgage Underwriting
• Consensus that housing finance a
common theme among banking crises
• FSB thematic review (March 2011)
• FSB Principles for Sound Residential
Mortgage Underwriting (April 2012)
• OSFI Guideline B-20
22
Housing Prices in Canada
23
Shadow Banking
• Shadow banking defined as “credit
intermediation involving entities and activities
outside the regular banking system.” (FSB)
– $27 trillion in 2002 to $60 trillion in 2007
• FSB report on Shadow Banking: Strengthening
Oversight and Regulation in Oct. 2011
• Five work streams
– Bank interactions with shadow banks – BCBS
– Money market funds (MMFs) – IOSCO
– Other shadow banking entities – FSB task force
– Securitization – IOSCO
– Securities lending and repos – FSB task force
24
Shadow Banking Flow Chart
25
Corporate Governance
• Corporate governance lapses seen as contributor
to banks taking excessive risks prior to the crisis
• FSB Principles for Sound Compensation
Practices released in 2009
– Bank bonuses should not provide incentives to take
imprudent decisions
• A plethora of reports on governance
– UK Walker Report (2009)
– BCBS Principles (2010)
– SSG Report on Risk Appetite (2010)
– G30 Report (2012)
26
Corporate Governance (Cont.)
• The critical role of the Board of Directors
– Independent oversight of strategy, controls, etc.
– Competencies and skills
• Risk governance
– Risk appetite
– Role of the Chief Risk Officer (CRO)
– FSB thematic review in 2012/13
• OSFI Corporate Governance Guideline
(2013)
27
Final Thoughts
28
A New Era…
• “Too big to fail” has not been solved. Much
work to be done
• 50 years from now, we will be referring to this
period in economic history in the same way that
we now refer to the Great Depression
– The scale, complexity and speed of the 2008 crisis
– The flurry of international policy activity that has
followed
• Canada did a lot right, but it is important not to
be complacent
– This is a once-in-a-generation opportunity to
holistically evaluate global banking standards and the
domestic regulatory regime
29
Questions?
30