What it means
OSFI was established in 1987, bringing together two earlier bodies that had supervised banks and insurers. It supervises institutions that are federally regulated, which includes all banks operating in Canada and many insurers and trust companies.
Provincial bodies regulate matters such as credit unions in many cases, and securities markets are overseen separately by provincial regulators. Its approach is based on risk.
OSFI reviews each institution's capital, liquidity, governance, risk management and financial condition, and rates how closely it needs to be watched. It issues guidelines that explain what it expects, such as capital adequacy rules that follow the international Basel standards.
Capital is central to its work. A bank must hold enough high-quality capital, mainly shareholders' equity, to absorb losses relative to the riskiness of its assets.
OSFI sets the minimum levels and can ask for more from institutions it regards as especially important or risky. OSFI also steps in when an institution is in difficulty.
It can require corrective action, take control of an institution in severe cases, and work with the Canada Deposit Insurance Corporation and the Bank of Canada. Its purpose is to reduce the chance of failure, though it does not guarantee that no institution will ever fail.
OSFI also looks at emerging risks, such as cyber attacks, climate change and reliance on outside technology suppliers. It expects boards to understand these risks, set limits and test their plans regularly.
Institutions that fall short may be told to strengthen their controls before they are allowed to grow. For business owners and managers, OSFI's work shapes the cost and availability of loans, insurance and pensions.
Rules on capital affect how much banks charge for lending, and guidance on technology and third-party risk affects the vendors banks use. Companies that run Canadian pension plans must also meet funding and reporting standards that OSFI oversees for federally regulated plans.
In practice
Real-world examples.
Example
A Canadian bank plans a large acquisition and reviews how the purchase will affect its capital ratio. The finance team shows OSFI its forecast and stress tests. The regulator checks that the bank will still hold enough capital after the deal.
Example
A life insurer wants to launch a new product that guarantees returns to customers. OSFI's guidance requires the insurer to hold capital for the risk that investment returns fall short. The actuaries build the cost into the price of the product.
Example
A manufacturing company with a federally regulated pension plan files its annual funding report. The plan is short of the assets needed to meet future pensions. The company agrees a schedule of extra payments to close the gap.
Formula
Calculation
Common Equity Tier 1 ratio = common equity tier 1 capital / risk-weighted assets
A bank holds $9,000,000,000 of common equity tier 1 capital, which is mainly common shares and retained earnings. Its assets, adjusted for their riskiness, total $75,000,000,000. Ratio = 9,000,000,000 / 75,000,000,000 = 0.12, or 12%. The bank would compare this figure with the minimum and any extra buffer that the regulator requires.Case study
Seen in the real world.
Northern Crest Trust is a fictional trust company used to illustrate OSFI supervision. In this illustrative story, its mortgage book grew by 40% in a year, which was much faster than its risk controls. An OSFI review noted that checks on borrower income were weaker than its guidelines expected.
The regulator asked Northern Crest to tighten its lending standards and to hold extra capital while it improved its systems. The company raised $25,000,000 of new equity and hired more underwriters to review loans. Growth slowed to 10% the following year, but the capital ratio improved and the extra supervisory attention ended.
The company's chief financial officer later said that the review was uncomfortable but useful. It forced the board to see that growth without control can create losses, and Northern Crest now links its lending targets to measures of credit quality.
Watch out
Common mistakes.
- Believing OSFI supervises every financial business in Canada. Securities dealers and many credit unions are regulated by provincial bodies.
- Thinking OSFI insures deposits. Deposit insurance is provided by the Canada Deposit Insurance Corporation.
- Assuming supervision removes the risk of failure. The aim is to reduce the chance and impact of failure, not to eliminate it.
Questions
People also ask.
What does OSFI regulate?
It regulates federally regulated banks, insurance companies, trust and loan companies, and federally regulated pension plans.
Who does OSFI report to?
It reports to the Minister of Finance but acts independently when supervising institutions.
Is OSFI like the OCC in the United States?
They have a similar role in supervising banks, though OSFI's responsibilities are broader because it also covers insurers and pension plans.
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