June 10, 2021 – Banks and insurers would benefit from greater clarity on how the Office of the Superintendent of Financial Institutions (OSFI) conducts prudential supervision, says a new report from the C.D. Howe Institute.
In “Let There Be More Light: Enhancing Public Accountability for Prudential Supervision,” former Deputy Superintendent of Financial Institutions at OSFI, Mark Zelmer reviews the prudential supervisory frameworks used by OSFI and its provincial counterparts to oversee banks, insurers, credit unions and other deposit-taking institutions. Zelmer then takes a deep dive into the current accountability arrangements surrounding prudential supervision, the accompanying economic rationales for secrecy, and offers a suite of reforms which would lead to greater public accountability.
“The problem is banks and insurers don’t understand how OSFI is supervising them,” explains Zelmer. “With a new federal Superintendent of Financial Institutions due to be appointed later this month, it’s timely to review the processes around prudential supervision to reduce some of the uncertainty around how regulators exercise their judgement.”
Zelmer points out there is no discussion in OSFI’s supervision framework about how supervisors actually measure and assess the risks to which financial institutions are exposed, nor any details about how supervisors evaluate the quality of an institution’s risk-management practices. Furthermore, one learns little about how supervisors determine the amount of capital and liquidity they believe an institution should carry over and beyond the minimum requirements contained in regulatory guidelines, given the institution’s risk exposures and risk-management capacity. As a result, there is a fair amount of opacity in how supervision is conducted in practice because the regulatory requirements that supervisors apply are themselves generally articulated in the form of principles rather than specific requirements.
The need for secrecy has traditionally been defended on the grounds that in the case of complex financial institutions like banks and insurers, there is a significant risk that if it becomes known that a prudential supervisor has concerns, it could bring forward a failure that might otherwise have been avoided. But, asks Zelmer, how much secrecy is truly required to conduct effective prudential supervision?
Zelmer notes Canada has been blessed with few failures of financial institutions in recent decades, suggesting that prudential supervision at both the federal and provincial levels has largely operated well behind this opaque veil. It nevertheless makes sense to ensure that Canadian supervisory practices keep pace with those of other jurisdictions.
The recommendations can be summarized as follows:
For more information contact: Mark Zelmer, Senior Fellow, C.D. Howe Institute and former Deputy Superintendent of Financial Institutions, OSFI; or David Blackwood, Communications Officer, the C.D. Howe Institute, 416-873-6168, email@example.com.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.