Operational risk management will be prioritised this fall
The Office of the Superintendent of Financial Institutions (OSFI) has released its first Annual Risk Outlook report, emphasizing the “unprecedented run-up” in home prices that has led to overleveraged borrowers and overexposure to a market correction.
Although lenders are believed to be “well-capitalized and appear to be financially resilient,” the regulator said “such a sequence of events could lead to borrower defaults, a disorderly market reaction and broader economic uncertainty and volatility.”
Read next: OSFI issues stress test updates
As such, the OSFI is considering expanding the application of stress tests to include reverse mortgages, mortgages with shared equity and combined loan plans as these products become increasingly common. The current stress test sets the qualifying rate for mortgages at 5.25% or the contract rate plus 2% – whichever is higher.
As the overnight rate is forecast to increase two points in a year, the minimum qualifying rate (MQR) could need a revision, but the next planned MQR announcement is still seven months from now on December 15.
The 2022-2023 Annual Risk Outlook had also identified cyberattacks, digitalization of money, climate change and more as the most critical risks to the financial system. Part of OSFI’s efforts to do more is to help financial institutions spot technology weaknesses and plans to consult on a draft guideline on operational risk management this fall.
“With our inaugural Annual Risk Outlook, we are providing transparency to Canadians about the financial system risks facing our country and our supervisory and regulatory responses to those risks,” Superintendent Peter Routledge said. “In so doing, we commit ourselves to strengthening the prudential oversight framework for Canada’s federally regulated financial institutions and pension plans which, in turn, will add to financial system resilience.”
The OSFI will also issue guidance on expectations of institutional climate risk management and financial disclosures and, along with the central bank, conduct exercises to assess the impact on mortgage, securities portfolios and balance sheets.
