OSFI stands for the Office of the Superintendent of Financial institutions. It’s an independent federal agency that reports to the Minister of Finance. It was formed in 1987 through the consolidation of the Department of Insurance and the Office of the Inspector General of Banks. Its key mandate is acting as the independent regulator in maintaining financial stability of the banking system.
Canadas Banking Oligopoly
Financial oversight of the banking industry in Canada is critical, as our banking is highly concentrated among the big 5 banks (RBC, TD, Scotia, CIBC and BMO), which collectively hold 85% of domestic banking assets. This compares to the US, where there are over 4000 FDIC-insured banks and the systemic risk of a banking collapse is less, due to this diversity. Banks fail semi regularly in the US all the time, with little fan fare. In Canada though, if one of the big 5 failed it would be cataclysmic.
What OSFI got right
Following the 2008-2009 financial crisis, and increasing household debt in Canada OSFI released the B-20 guideline, known as the “Mortgage Stress Test”. The guideline came into effect in Jan of 2018 in the face of a housing market in Toronto that was starting to overheat. What it did was force borrowers to qualify at the minimum qualifying rate (i.e. the stress test) for mortgages. The rules were as follows:
Borrowers must qualify at the greater of:
- The contract rate +2%, or
- The Bank of Canada’s 5-year benchmark rate
In essence if you got a mortgage at 3% they wanted to ensure you could afford it at 5%. This was fortuitus timing, because during the COVID pandemic rates went to all time lows then sprang up to generational highs as inflation took hold. Many people took out variable rate mortgages at sub-2% and then went all the way to 6%. Because they were stress tested the level of mortgage defaults remained low.
Who funds OSFI
What I found really interesting while researching this article, was that OSFI is actually funded by the banks and pension plans that it regulates. Its revenues comprise assessments, service charges and fees. Its most recent 2024 budget showed expenses of $291 million dollars and a staff of over 1000 people. This funding also produced probably the best Federal departmental logo I have seen.
What’s the future for OSFI
Recently OSFI has been reviewing the Capital Adequacy Requirements Guidelines to ensure the banks are well capitalized. Additionally they are releasing crypto asset guidelines, Climate Risk (B-15) and the minimum capital test (MCT) for insurers.
