Our journey to transform OSFI

Transforming OSFI for tomorrow 

OSFI is celebrating the progress made over the last 18 months, since we publicly launched A Blueprint for Transformation 2022-2025. OSFI’s Blueprint is a critical step in our journey to becoming a more resilient, nimble, and effective regulator. Over the next few weeks, we will provide a series of progress updates across six transformation pillars.

One of those transformation pillars is Policy Innovation. We are innovating our policy in a number of ways to help us quickly and effectively respond strategically to new risks as they emerge.

One way is by improving the way we develop policy and streamlining and simplifying these documents. This initiative is called Policy Architecture Renewal, and it will help:

·      industry more easily understand and comply with our regulatory expectations

·      us supervise industry and its activities more effectively and efficiently

We have also created two new dedicated teams, the Climate Risk Hub and Digital Impact and Innovation Hub, to help us mature our risk response capabilities.

OSFI’s Blueprint is a critical step in our journey to becoming a more resilient, nimble, and effective regulator.

Climate Risk Hub

 The Climate Risk Hub is a team of 30 people dedicated to leading OSFI’s response to climate-related risks. It is structured on four dimensions:

1.      Policy and risk management

2.      Scenario analysis and risk quantification

3.      Data analytics, measurement and disclosure

4.      Stakeholder engagement

Policy and Risk Management

The Climate Risk Hub published our first ever Guideline B-15 on Climate Risk Management in March 2023. It responds to the threats that climate change poses to the safety and soundness of federally regulated financial institutions (FRFIs), and the financial system more broadly.

When developing this guideline, we met with representatives across all sectors, including members of the public in all regions, to better understand the impact of our regulations on their businesses. We received over 4,300 submissions during the most extensive consultative process in OSFI’s history.

Guideline B-15 will apply to more than 350 federally regulated banks and insurers. OSFI’s expectations relating to climate will be integrated with its new Supervisory Framework, another transformational Blueprint initiative.

Scenario Analysis

The Climate Risk Hub will also leverage scenario analysis, which allows us to understand and quantify the risks and uncertainties financial institutions may face under different hypothetical futures.

Later this year we will publish the results of a climate scenario analysis exercise currently underway, in partnership with the Bank of Canada. The exercise is designed to assess the impacts of floods on banks’ residential mortgage portfolios.

We are also developing a standardized climate scenario analysis exercise that all financial institutions will undertake in 2024. It will incorporate learnings from the scenario exercise that is underway and will build on the pilot work and report released in 2022.  

Data Analytics, Measurement and Disclosure

Data is critical in helping us understand exposures to climate-related risks. This is why Guideline B-15 includes expectations for financial disclosures that are aligned with emerging global standards.

This data will provide transparency to market participants on the climate-related risks that Canadian FRFIs face and how they are managing those risks.

Data is critical in helping us understand exposures to climate-related risks.

We are also working with the Bank of Canada and Canada Deposit Insurance Corporation (CDIC) to develop a regulatory return to collect climate-related risk data from financial institutions. This will help us monitor financial institutions’ exposure to climate risks.  

Stakeholder Engagement

We will continue to raise awareness and build capacity to respond to climate-related risks by launching the Climate Risk Forum.

The Climate Risk Forum will be an innovative and adaptable way to enable the Hub to engage a wide array of stakeholders. It will leverage industry information sessions, roundtables, and technical workstreams to help Canada’s regulated financial sector navigate the challenges of managing climate related risks, further strengthening public confidence in Canada’s financial system.

If you are interested in learning more, please visit our website to learn more after the launch on June 19.

We will continue to raise awareness and build capacity to respond to climate-related risks by launching the Climate Risk Forum.

Digital Impact and Innovation Hub (DIIH)

The DIIH is a team of over 25 people dedicated to leading OSFI’s supervisory and regulatory response to an evolving digital innovation landscape. It is structured on four pillars:

1.      Policy

2.      Supervisory

3.      Stakeholder Engagement

4.      OSFI’s Digital Innovation Sandbox

Check out OSFI’s Proposed Short-and-Medium Term Roadmap for an Evolving Digital Landscape to learn more about digital priorities for the upcoming years.

 Policy

Digital innovation is a new and constantly evolving space, so it is important our guidelines evolve at the right pace to address actual and emerging risks.

The DIIH’s key areas of focus include fiat-referenced crypto-assets and how they are being custodied. This is because some crypto-assets have the potential to become widely adopted means of payment and pose risks to the Canadian financial system.

In November 2022 we issued a joint Statement to entities engaging in crypto assets activities or crypto related services with the Financial Consumer Agency of Canada (FCAC) and CDIC. It signals federal regulators’ intentions to work in collaboration to shape Canada’s digital regulatory landscape.

More recently, on April 17, 2023, the DIIH launched a consultation on the management of risks associated with single fiat-referenced crypto-asset arrangements and activities.

Feedback from the 9-week consultation will expand our understanding of non-traditional business models and help inform the development of potential risk management expectations for FRFIs engaging in those activities.

We invite FRFIs and other financial entities to review the consultation questions on our website and send us feedback by June 16, 2023.

Further work from OSFI on crypto disclosures is to be expected according to the Budget 2023 announcement.

Supervisory

In the supervisory space, we continue to:

·      provide education to OSFI supervisors on emerging issues in the digital space. This will better enable our supervisors to address these issues with industry.

·      actively participate in domestic and international cross-agency discussions on areas of focus such as open banking, digital currencies, and other potentially disruptive technologies. These discussions allow us to stay at the leading edge of supervisory practices.

·      engage in industry outreach to allow OSFI supervisors to stay on top of of emerging technology usage in the Canadian context and gauge supervisory responses as appropriate.

Stakeholder Engagement

Input from a broad range of stakeholders is important to help us achieve our goal of becoming a global leader in the digital regulatory space.

This is why we are launching two initiatives this year:

1. OSFI’s Digital Innovation Open Door: we will be hosting a series of stakeholder engagement opportunities in June to allow us and industry to have open discussions on digital innovation topics. Visit our website to learn more and to register by May 26, 2023.

2. OSFI’s Digital Innovation Summit: launching in December 2023, this initiative will gather industry, domestic and international regulators, and subject matter expert speakers (lawyers, academia, technical crypto experts).

These discussions will:

·      uncover emerging innovations in financial technology and digital finances

·      feed into the development of expectations, guidelines, and supervision

·      help us build synergies among key players in the financial sector

More information on our Digital Innovation Summit will be released later this year.

We will be hosting a series of stakeholder engagement opportunities in June to allow us and industry to have open discussions on digital innovation topics

OSFI’s Digital Innovation Sandbox (ODIS)

Generally, most innovation sandboxes are controlled environments where organizations can experiment and test new technologies and ideas.

OSFI’s Digital Innovation Sandbox, or ODIS, is unique. It will virtually bring together domestic and international technology companies, financial institutions, government regulators and agencies, and industry groups. They will experiment with new technologies and digital activities and learn about the potential risks that could impact financial stability. 

The findings will help OSFI inform regulatory policy, guidance, and supervision of risks that could jeopardize the safety and soundness of financial institutions. They could also help industry better assess the feasibility of their innovations.

The ODIS team has been in place since March 2023, and is working on the program and product designs so we can launch the inaugural round of experimentation to pilot the programs and products. A call to the market for applications is planned for late 2023.

Conclusion

The Climate Risk Hub and Digital Innovation and Impact Hubs are well on their way to helping us become a global leader in prudential supervision by making policy to ensure operational and financial resilience of our regulated entities in the face of climate-related, digitalization, and other yet-to-be-seen risks.