Banking Regulatory Year in Review and Outlook

This Bulletin summarizes key regulatory developments impacting the Banking sector in 2023 and looks ahead to 2024.

Key Developments in FI Regulation

Guarding against a Housing Crisis

With industry reports warning that rapidly rising interest rates meant 1 in 5 variable rate mortgages were negatively amortizing in 2023 and that over 3 million mortgages will come up for renewal in the next 18 months, the federal government and OSFI both encouraged financial institutions (FIs) to actively mitigate this risk.

• FIs were urged to follow a new Mortgage Charter announced in the Fall Economic Statement, which included the new Guideline issued by the Financial Consumer Agency of Canada in July 2023, and an exemption for borrowers to requalify for the insured mortgage stress test with their existing institution. 
• The Mortgage Charter encourages FIs to not accrue interest on unpaid mortgage interest. OSFI updated its Capital Adequacy Requirements  to confirm that institutions must hold more capital for mortgages where payments do not cover the interest portion of the loan. The revised capital guidelines are effective fiscal Q1 2024, which is January 1, 2024 for institutions with a fiscal year end of December 31st. 
• OSFI also consulted early in 2023 on different options to address high housing indebtedness and rising rates, for possible changes to Guideline B-20  as detailed in our bulletin OSFI Seeks Input on More Stringent Mortgage Underwriting Rules. A summary of the consultation feedback is expected in early 2024.

 Responding to the Pandemic’s Economic Impacts

The pandemic led to higher interest rates to combat inflation and high vacancy rates in commercial real estate in 2023.  This resulted in a focus by regulators on credit risk:

• Internal audit teams are required by OSFI’s advisory notice  to support its review of Internal Capital Adequacy Assessment Process (ICAAP) assessments.  The next ICAAP submission is due by March 31, 2024, for all FIs and an audit review, including a view on the ICAAP rigour and key risk identification, is due by May 31, 2024.
• Several other regulators, including the British Columbia Financial Services Authority, and Ontario’s Financial Services Regulatory Authority forecast that they would review capital requirements to address rising credit default risks;
• OSFI issued a Regulatory Notice in September 2023, requiring that FIs review their risk management, underwriting and account/portfolio management for commercial real estate loans to support enhanced supervisory work in this area.
• Updated disclosure requirements were issued for both the largest banks and small and medium-sized FIs to reflect the Pillar 3 disclosure recommendations of the [international] Basel Framework. 

There were also several capital changes that only apply to Canada's largest banks (DSIBs), including:

• An increase to the Domestic Stability Buffer of 0.5% to 3.5% of total risk-weighted assets was announcedby OSFI in June, effective November 1, 2023.  However, OSFI advised in December 2023 that there would not be further increases this year.
• OSFI updated its Total Loss-Absorbing Capacity (TLAC) Frameworkin September 2023, to support the implementation of “bail-in” on the basis of the stand-alone financial strength of the parent bank.  

Major Focus on Non-Financial Risks 

Digital innovation and Canada’s widespread wildfires in 2023 continued to underscore the impact of non-financial risks on FI operations and resiliency. The federal government responded with legislative changes and OSFI issued several new guidelines:  

• The Bank Act and related statutes were amended in June 2023 to give the Minister specific powers concerning foreign interference, including the ability to direct OSFI to take control of an FI or to require shareholders to sell their shares. OSFI’s mandate was also expanded.  In order to facilitate an annual report to the Minister, OSFI will now require FIs to have protections in place to counter threats to their integrity or security, including foreign interference. Following a consultation [in November 2023] on its new draft Integrity and Security Guideline, FIs are expected to have several related policy and procedures updated in early 2024. 
• OSFI has proposed substantial revisions to its Guideline E-21: Operational Resilience and Operational Risk Management. More details are included in our bulletin OSFI Releases Two Draft Guidelines Addressing Non-Financial Risks. The four-month public consultation is open until February 5, 2024.
• Several consultations were launched by OSFI in 2023 relating to digital innovation around the supervision of stablecoin activities, their related capital treatment , and the disclosureof FI exposures to these crypto-assets.  More broadly, OSFI’s new Guideline B:13 – Technology and Cyber Risk Management comes into effect on January 1, 2024.
• OSFI made significant changes in the updated Guideline B-10: Third Party Risk Management. Details can be found in our bulletin, OSFI Released New B-10 Guideline on Third-Party Risk Management. The changes come into effect in May 2024.
• OSFI has set out its expectations relating to climate risk in its Guideline B-15: Climate Risk Management, which was finalized in April 2023. It takes effect fiscal year-end 2024 for DSIBs and fiscal year-end 2025 for all other FIs.  A Climate Risk Forum was launched in June 2023 by OSFI, in partnership with the Bank of Canada and the Canada Deposit Insurance Corporation, to support consultations on climate risk measurement and reporting. 
• Updates have been proposed for OSFI’s Guideline E-23: Model Risk Management. The consultation closes on March 22, 2024.
• In Spring 2023, OSFI launched a new draft Culture and Behaviour Risk Guideline, as detailed in our article OSFI Consultation on Culture and Behaviour Risk. It is expected to support multiple other guidelines once finalized.  

Looking Ahead

The pace of banking regulatory developments is not expected to slow down. As outlined, many new or updated OSFI guidelines are expected to take effect in 2024. OSFI has also announced a renewal of its Supervisory Framework, which is its first comprehensive update in 25 years, and more information is expected in early 2024.