Evidence of meeting #84 for Finance in the 44th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was risks.
A recording is available from Parliament.
Conservative
Adam Chambers Conservative Simcoe North, ON
I have only about a minute left, so you have 30 seconds.
Superintendent, Office of the Superintendent of Financial Institutions
Okay. I'll try to be very brief.
Capital risk weightings are very technical. They're built bottom-up from historic credit analysis. That's—
Conservative
Adam Chambers Conservative Simcoe North, ON
Will a financial institution be forced to hold more capital against a loan that an oil and gas company takes?
Superintendent, Office of the Superintendent of Financial Institutions
We're not changing that approach.
Superintendent, Office of the Superintendent of Financial Institutions
We will always be empirically driven in our credit risk rates.
The problem is that credit risk analysis is driven by historical data. The unique feature of climate risk is that we're talking about events that haven't happened yet, and we're trying to make predictions about the future.
There's every intent and determination on our part to make sure we maintain our empirical, prudential, rigorous standards. Any change in risk ratings should flow out of disciplined, bottom-up credit risk management in the way that credit risk ratings—
Conservative
Adam Chambers Conservative Simcoe North, ON
That would be happening anyway. If a risk rating changes by a third party.... That's already happening. I fail to understand why OSFI should be getting involved in climate risk analysis and disclosure when the private sector is already demanding it. Frankly, the discussion around climate risk policies belongs in that chamber over there called the House of Commons and not necessarily with a financial regulator.
It seems to me to be a little broadening of the scope of OSFI's mandate, which we never debated, frankly.
Liberal
The Chair Liberal Peter Fonseca
Thank you. Your time is up. Now we're moving to the Liberals.
Mr. Baker, you have six minutes.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
Thank you for being here.
I have a number of questions, so I'll ask you to be as concise as you can, noting, of course, the complexity of some of the issues that I'm going to ask you about.
First off, building on the discussion you were just having with my colleague from the Conservative Party, what is OSFI's mandate? For the sake of Canadians and constituents who are watching, who are these folks at OSFI, and what do they do?
Superintendent, Office of the Superintendent of Financial Institutions
There are two parts to that.
Our purpose is to contribute to public confidence in the Canadian financial system. That's a broad financial stability instruction. How do we do that? We do that by supervising financial institutions. When we identify risks through that supervision, we oblige boards of directors to take prompt actions to address those risks. We put in place principles-based guidelines to manage those risks. We watch broader systemic trends and make sure that the industry is prepared to deal with them as early as possible.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
What would happen if we didn't have OSFI and didn't make sure that we were managing those risks? From the perspective of a constituent, what could happen?
Superintendent, Office of the Superintendent of Financial Institutions
Generally speaking, financial systems that don't have strong prudential regulations tend to be more volatile, and that volatility comes at a cost to the economy. More unstable banks that tend to fail more will mean that your economy will be weaker. We've built up this system of regulations in order to keep our economy strong.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
In a worst-case scenario, for example, you might see a bank default if it wasn't properly managing its risk.
Superintendent, Office of the Superintendent of Financial Institutions
Yes, it's happened in Canada before. It hasn't happened for a long time, but it has happened.
Liberal
Superintendent, Office of the Superintendent of Financial Institutions
We saw it last month.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
We saw it last month.
People could go the bank to ask for their deposits, and the bank could say, “We can't live up to our commitments. We can't get you your money back,” for example. Also, mortgage rates could be affected, or the housing market could crash, like we saw in 2007-08 during the financial.... Things like that could happen. Is that fair?
Superintendent, Office of the Superintendent of Financial Institutions
Yes, I live that every day.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
Your role in regulating risk in our financial system is super important. It's not something that just affects the banks. It affects Canadians every single day.
Superintendent, Office of the Superintendent of Financial Institutions
Yes.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
Before we get into climate risk, can you talk about the kinds of risks that OSFI ensures that the banks are properly managing?
Superintendent, Office of the Superintendent of Financial Institutions
Traditionally, bank and insurance company regulators look at credit risk, which is the risk that you make a loan and people don't pay you back; investment risk, which is the risk that you make an investment and you lose money; and liquidity risk, which is the risk that someone asks you for what they're owed and you can't pay them back. That's the core thing.
What we've learned, particularly since the global financial crisis, is that risk environments are growing more complex, and risks that don't appear to be financial can actually have very strong financial consequences. Corporate governance would be a risk area. Cyber-risk would be a risk area. Reliance on a third party for critical services would be a risk area.
Climate has emerged as a risk that has the potential to have real financial impacts on financial institutions. Were we to set climate aside and not oblige our institutions to deal with that risk, in our judgment, we wouldn't be fulfilling our purpose and mandate.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
In terms of the climate risk, why...? You've talked about these other risks you're ensuring that the financial institutions and the banks are managing. You've talked about what the implications are if banks don't manage these risks.
You recently added an assessment of climate risk as a part of that. What are the implications of not managing climate risk?
Superintendent, Office of the Superintendent of Financial Institutions
There are a variety of implications.
To the point that was made earlier, some institutions would still get at this and would manage their balance sheets in a pretty responsible way. My experience is that if you don't have rigorous regulations, there are always institutions that are less inclined to do that. I'll use the word “shirk”.
The problem isn't the financial system. One bad apple can make things really costly for all of the other good apples. Part of regulation is to make sure that everyone is operating to a specific standard. We do it with mortgage underwriting in a guideline we call B-20. It's a classic example of bringing everyone in the system up to a minimum level. That's a core reason for doing it.
The other reason we should do it is because our institutions are internationally active. They raise money overseas and they use it to make investments here in Canada, whether it's in residential mortgages or business loans. If our institutions aren't seen to be managing this risk intelligently, and one of the criteria is that the regulator's serious about climate risk, then their cost of funding could go up.
We're very sensitive to investor perceptions about the strength and reliability of Canada's financial institutions.
Liberal
Yvan Baker Liberal Etobicoke Centre, ON
In 20 seconds, can I ask you what the worst-case scenario is if climate risk were not being managed by financial institutions? What could happen, from the perspective of financial institutions?