Thank you, Mr. Chair.
Thank you, on behalf of the superintendent and the rest of my colleagues at OSFI, for the invitation to be here today.
The health of the housing sector is important to the Canadian economy and to the health of Canada's financial sector, and we welcome the opportunity to participate in the committee's deliberations.
OSFI is Canada's prudential regulator and supervisor of federally regulated financial institutions. Our oversight includes banks, insurance and trust companies, and private pension plans. Approximately 80% of the mortgages issued in Canada are held by financial institutions under OSFI's supervision, and residential mortgages represent almost 30% of the assets held by the banks we supervise. Our responsibilities also include the monitoring and examination of the three mortgage insurers operating in Canada, including my colleagues from CMHC. Accordingly, OSFI keeps a close eye on the risks impacting the mortgage market, such as underwriting and risk management practices of lenders and mortgage insurers, as well as the broader risks, including economic conditions and the interest rate environment. OSFI's mandate is to protect the depositors, policyholders, and creditors of the institutions we supervise, while allowing them to compete and take reasonable risks.
At a policy level, OSFI fulfills this mandate through two key activities: setting principles and standards for sound risk management in financial institutions in the form of guidelines and other policy directives, and setting the minimum requirements for the quantity and quality of capital that financial institutions must hold.
OSFI's expectations with respect to risk management practices in the residential mortgage market are made clear in two separate policy guidelines: B-20, which sets out the principles for mortgage lenders, and B-21, which sets out the principles for mortgage insurers.
Minimum capital requirements for banks and insurers are evaluated by OSFI on an ongoing basis and are designed to ensure that lenders and insurers have sufficient capacity to absorb severe but plausible losses.
At an operational level, OSFI fulfills its mandate through a rigorous supervisory regime that combines continual monitoring and an examination process that ensures financial institutions comply with our guidelines and continue to hold capital and liquidity given their respective risk profiles.
Like all financial regulators, OSFI has worked hard in recent years to incorporate the lessons of the financial crisis in our policies and practices. Key among these lessons was that the vulnerabilities that build up in the residential mortgage markets, such as stretched housing valuations and high rates of consumer debt, can lead to financial instability and sharp contractions in economic activity. Deteriorating lending standards of lenders and insurers, and financing structures with misaligned incentives, can fuel these vulnerabilities.
Since the financial crisis, OSFI has made a range of adjustments to both our policy guidelines and our capital requirements for mortgage lenders and insurers. These adjustments reflect the lessons we've learned and the vulnerabilities evident in the Canadian market. Recent examples of these changes include requirements for certain mortgage lenders to hold additional capital for mortgages that originated in markets where housing price increases are significantly outpacing income levels. We've also recently adjusted the formulae mortgage insurers must use to calculate the capital, to incorporate a wider set of risk indicators.
In addition to policy changes, OSFI has increased its supervisory intensity of mortgage lending and tightened our expectations around mortgage underwriting practices. Most recently, just this past summer, OSFI issued a letter to the industry reminding them not to be overreliant on the collateral value of housing assets and to be diligent in assessing a borrower's willingness and ability to make payments on a timely basis. This letter was followed up by a series of targeted examinations.
These are just a few examples of OSFI's work with regulated entities designed to promote prudent mortgage lending and insurance practices, thereby increasing the resilience of Canadian financial institutions to adverse shocks and ensuring they are prepared for the unexpected.
Before I conclude, I would add that while OSFI is an independent regulatory agency, it does not operate in isolation. At the federal level, OSFI co-operates with key agencies, notably the Department of Finance, my colleagues here from the Bank of Canada, the Financial Consumer Agency, and the Canada Deposit Insurance Corporation. Although each of us has a distinct mandate, role, and focus, we all work in coordination to maintain a strong and stable financial system, a system in which Canadians can place their trust.
Thank you for your time. I look forward to your questions.