On September 30^th, Jeremy Rudin, the newly appointed Superintendent of Financial Institutions gave his first public address at a meeting of the Economic Club of Canada in Toronto.  The speech presented the first opportunity to learn more about Rudin and the direction that he may take OSFI.  His speech certainly left us with some food for thought.

Banks provide essential services

In his opening remarks, the Superintendent stated that financial services are essential services and that OSFI’s role is to protect the public interest.  He also stated that if these essential services were to come under stress and be threatened, then the government would be compelled to intervene.  In particular, he mentioned that it is OSFI’s role to restrain excessive risk taking. 

While these comments may not be controversial in a post-financial crisis era, in a free market economy, regulators must always attempt to find a balance between letting the market dictate the way in which business is conducted and regulating to protect the public interest.  The question then is whether Rudin’s remarks reflect a bias towards even closer regulation for the industry.

Two prongs to regulation

Rudin stated that in order to restrain excessive risk taking OSFI would continue with its existing two pronged approach of setting expectations through principles-based guidance and closely monitoring adherence to the guidance.  He said that this approach helps ensure that regulatory compliance does not become a substitute for good risk management.  And, while he believes that management are best placed to know and manage their risks, he also said that he believes in an old Russian proverb, “Trust, but verify”.

As Rudin comes from the Department of Finance where he was responsible for financial sector policy, it is not surprising that he favours a principles-based approach.  That approach has been plainly evident in the regulations developed by the Department for a number of years.  However, given his policy background, there may have been some question about how he viewed OSFI’s supervisory role.  At very least, his comment signal to his supervision staff that he supports and values the importance of their work.

The role of international standards

Since the financial crisis, there has been a growing concern over the internationalization of regulation making with all meaningful regulatory developments emanating from international bodies such as the Basel Committee and the Financial Stability Board.  The concern is heightened by a belief that Canada often prefers to lead the world by adopting even stricter requirements than those recommended by these bodies.  While Rudin took the time to say that he believed that Canada’s approach had benefited institutions, he also pointed out some examples where Canada had adopted a less stringent requirement than those adopted by other jurisdictions.  Rudin’s comments may have been meant to appease those who are concerned that strict adherence to international standards, and indeed exceeding them, is putting Canadian institutions at a competitive disadvantage.

Big bank small bank dilemma

For years, the smaller banks have argued that it is not possible for them to maintain the same risk management and compliance programs as the large banks as their ability to generate revenue will not support the cost of these programs.  Rudin stated that he intends to continue the work begun by his predecessor to formulate regulatory guidance and to calibrate supervision so that the regulatory burden on smaller institutions can be more closely fit for purpose.  He also acknowledged that the smaller banks are looking for more tangible evidence that they are being heard.  Perhaps this means that future guidance and supervisory practice will contain more explicit distinctions between large and small banks .

While it is always dangerous to read too much into a speech, given that this was the first public appearance by the new Superintendent, no doubt he chose his words carefully.  However, only time will tell what impact his leadership will have on his Office and the industry.

A copy of the Superintendent’s comments is available here.