ARCHIVED - Office of the Superintendent of Financial Institutions Canada - Report

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Superintendent's Message

To date, Canada’s economy, and its financial sector in particular, have withstood the shocks of global financial turmoil better than many of its G-20 partners. Canada’s more positive experience has been attributed to a range of factors, including better risk management by our institutions, and strong regulation and supervision by OSFI.

Canadian financial institutions may have done a good job of managing risk, but the bar is constantly rising. As a result, OSFI has undertaken a number of reviews, in the areas of liquidity management, compensation, credit cards, US home equity lines of credit (HELOC), Alt-A mortgages, securitization, derivatives collateral management, and stress testing. These reviews help OSFI, and financial institutions, identify where possible strengths and weaknesses are across the sector. 

As part of ensuring that strong regulatory rules are in place, OSFI has taken an active role in international forums developing these rules. This work is being conducted under the leadership of the G-20 group of countries, with particular work streams led by the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB). The pace and extent of the reviews underway have required OSFI to significantly escalate its work in this area.

OSFI has also developed additional ways to promote robust risk management practices within financial institutions and pension plans. We continued to hold risk management seminars for deposit-taking institutions, life insurance companies, and property and casualty insurance companies. We also held the first of what will be an annual forum for private pension plan administrators. Feedback from participants at all these events was positive and indicated a desire that they continue. We continued to deepen the content of our supervisory colleges, including focusing on “living wills” (contingency plans and resolution plans by financial institutions), as well as participated in international supervisory colleges organized by other regulators.

Partnerships are also central to our effective functioning and management of risk. This past year, we continued to work closely with the Financial Institutions Supervisory Committee (FISC) on matters relating to the supervision of federally regulated financial institutions (FISC partners include OSFI, the Department of Finance, the Bank of Canada, the Canada Deposit Insurance Corporation, and the Financial Consumer Agency of Canada).

As always, our people are the most important element of OSFI’s success. It is their experience and critical judgement that allow us to fulfill our mandate and respond to increased pressure and workloads due to the current challenging economic environment. I extend a sincere thank you to all employees for their continuing hard work and demonstration of commitment to OSFI’s values: professionalism, integrity and respect for people.

SECTION I: DEPARTMENTAL OVERVIEW

Raison d’être

The Office of the Superintendent of Financial Institutions (OSFI) supervises and regulates all federally incorporated or registered deposit-taking institutions (e.g., banks), life insurance companies, property and casualty insurance companies, and federally regulated private pension plans.

OSFI safeguards depositors, policyholders and private pension plan members by enhancing the safety and soundness of federally regulated financial institutions and private pension plans. The work of OSFI contributes to the confidence of Canadians in Canada’s financial system.

The Office of the Chief Actuary (OCA) is a separate unit within OSFI. The OCA provides high-quality, timely advice on the state of various public pension plans and on the financial implications of options being considered by policy makers. The work of the OCA contributes to the confidence of Canadians in Canada’s public retirement income system.

Responsibilities

OSFI's legislated mandate was implemented in 1996 and under the legislation, OSFI’s mandate is to:

• supervise federally regulated financial institutions and private pension plans to determine whether they are in sound financial condition and meeting minimum plan funding requirements respectively, and are complying with their governing law and supervisory requirements;
• promptly advise institutions and plans in the event there are material deficiencies and take, or require management, boards or plan administrators to take, necessary corrective measures expeditiously;
• advance and administer a regulatory framework that promotes the adoption of policies and procedures designed to control and manage risk; and
• monitor and evaluate system-wide or sectoral issues that may impact institutions negatively.

In meeting this mandate, OSFI contributes to public confidence in the financial system.

OSFI’s legislation also acknowledges the need to allow institutions to compete effectively and take reasonable risks.  It recognizes that management, boards of directors, and plan administrators are ultimately responsible and that financial institutions and pension plans can fail.

Strategic Outcomes and Program Activity Architecture (PAA)

Primary to OSFI’s mandate and central to its contribution to Canada’s financial system are two strategic outcomes:

1. To regulate and supervise to contribute to public confidence in Canada’s financial system and safeguard from undue loss.
2. To contribute to public confidence in Canada's public retirement income system.

The chart below illustrates OSFI’s framework of program activities and program sub-activities, which roll-up and contribute to progress toward the strategic outcomes. 

[D]

Note: OSFI revised its PAA during 2009-2010 and these changes will be reflected effective 2010-2011 fiscal year.  These changes were made to clarify strategic outcome and program activity titles and descriptions.

Performance Summary

The tables below identify OSFI’s financial and human resources, planned and actual, for the 2009-2010 fiscal year.

2009–2010 Financial Resources (Millions)

Planned Spending	Total Authorities	Actual Spending
$100.0	$100.0	$100.9

2009–2010 Human Resources (Full-Time Equivalents)

Planned	Actual	Difference
491	530	39

OSFI’s total 2009-2010 spending of $100.9 million is $0.9 million (0.9%) higher than its planned spending of $100.0 million.  The incremental cost of 39 additional full-time equivalents (FTEs) was offset by significant savings as a result of the deferral to 2010-2011 of certain information technology projects pending the completion and approval of OSFI’s Information Management and Information Technology Strategy during 2009-2010.

The table below presents a summary of OSFI’s performance during the 2009-2010 fiscal year towards achieving its first strategic outcome.

Strategic Outcome 1: To regulate and supervise to contribute to public confidence in Canada’s financial system and safeguard from undue loss.

Performance Indicators	Targets	2009-2010 Performance
Percentage of knowledgeable observers who rate OSFI as doing a good or very good job at contributing to public confidence in Canada’s financial services industry.	70%	Last measured 2008-2009: A strong majority (88%) of Chief Executive Officers (CEOs of FRFIs) believe OSFI performs well in contributing to public confidence in Canada’s financial services industry. Source: Report on Financial Institutions Survey 2008 1
Percentage of estimated recoveries on failed institutions (amount recovered per dollar of claim).	90%	Total weighted average recoveries were 92% at 2009-2010 year end, which meets the set target of 90%.  Source: Canada Deposit Insurance Corporation, Agents, Liquidators
Percentage of estimated recoveries on pension plans that have terminated under-funded.	85%	One pension plan terminated under-funded in 2009-2010.  The recovery rate for this plan was 100%. Source: Internal data
Percentage of respondents that rate the assistance / presentations provided as relevant to their work.	80%	88% of respondents rated the assistance / presentations as relevant to their work. Source: Survey of International Advisory Group (IAG) program participants 2

¹ OSFI provided The Strategic Counsel, an independent research firm, with a list of CEOs of federally regulated financial institutions. The research firm invited the CEOs to participate in either an online or a telephone survey, and 166 (61%) participated. OSFI does not know which CEOs participated. The report is available on OSFI’s Consultations and Surveys Web page.

² Surveys are provided to workshop participants when IAG staff are the primary presenters. IAG delivered 30 such workshops in 2009-2010, with 923 participants. A total of 776 surveys were completed, for a response rate of 84%. 

The table below presents OSFI’s planned and actual spending by program activity for Strategic Outcome 1, and a comparison to actual spending in the previous year. Note for both strategic outcomes (including table from page 10), the 2008-2009 comparative figures have been restated to display resources for Internal Services separate from other program activities in order to conform to the presentation adopted in the 2009-2010 Estimates cycle.

Program Activity	2008-2009 Actual Spending	2009-2010				Alignment to Government of Canada Outcomes
		Main Estimates	Planned Spending	Total Authorities	Actual Spending
1.1 Regulation and Supervision of Federally Regulated Financial Institutions	$46.7	$48.6	$48.6	$48.6	$52.8	Strong economic growth A safe and secure world through international co-operation
1.2 Regulation and Supervision of Federally Regulated Private Pension Plans	$4.3	$4.8	$4.8	$4.8	$4.3	Strong economic growth Income security for Canadians
1.3 International Assistance	$1.8	$1.7	$1.7	$1.7	$1.7	Strong economic growth A safe and secure world through international co-operation
Total (millions)	$52.8	$55.1	$55.1	$55.1	$58.8

OSFI’s actual spending in 2009-2010 towards its Strategic Outcome 1 was $58.8 million, $3.7 million, or 6.8%, higher than planned. The increase is primarily in the Regulation and Supervision of Federally Regulated Financial Institutions program activity, and is largely driven by an increase of 27 FTEs in this program to respond to increasing work demands, primarily in the deposit-taking institutions group and the market, credit and operations risk areas. The increase is also attributed to normal economic and merit increases in employee compensation and the 15-basis-point increase in the Employee Benefit Plan rate as prescribed by Treasury Board Secretariat.   

The increase in actual spending of $6.0 million, or 11.4%, from the previous year is mainly attributed to OSFI’s growth in full-time equivalents (34 FTEs) resulting from filling approved vacancies, normal economic and merit increases and a 15-basis-point increase in the Employee Benefit Plan rate, as prescribed by Treasury Board Secretariat.

The table below presents a summary of OSFI’s performance during the 2009-2010 fiscal year towards achieving its Strategic Outcome 2.

Strategic Outcome 2: To contribute to public confidence in Canada's public retirement income system.

Performance Indicators	Targets	2009-2010 Performance
Actuarial reports fairly communicate the results of the work performed by the Chief Actuary and his staff.	Unanimous agreement	2009-2010 – N/A – no peer review in 2009-2010. The next independent peer review is scheduled for 2010‑2011. The external peer review panel’s findings received in March 2008 were that the 23rd Actuarial Report (Canada Pension Plan (CPP)) fairly communicates the results of the work performed by the Chief Actuary and his staff. Source: Review of the Twenty-Third Actuarial Report on the Canada Pension Plan dated 19 March 2008, conducted by the CPP Actuarial Review Panel.
Adequacy of professional experience of the Chief Actuary and his staff. AND/OR	Unanimous agreement	2009-2010 – N/A – no peer review in 2009-2010. The next independent peer review is scheduled for 2010‑2011. The external peer review panel’s findings received in March 2008 were that the 23rd Actuarial Report (CPP) complies with all relevant professional standards and that the Chief Actuary and his staff have adequate professional experience. Source: Review of the Twenty-Third Actuarial Report on the Canada Pension Plan dated 19 March 2008, conducted by the CPP Actuarial Review Panel.
Compliance with Canadian and international professional standards.	Unanimous agreement

The table below presents OSFI’s planned and actual spending by program activity for Strategic Outcome 2, and a comparison to actual spending in the previous year.

Program Activity	2008-2009 Actual Spending	2009-2010				Alignment to Government of Canada Outcomes
		Main Estimates	Planned Spending	Total Authorities	Actual Spending
2.1 Office of the Chief Actuary institutions	$3.6	$4.3	$4.3	$4.3	$4.2	Income security for Canadians
Total (Millions)	$3.6	$4.3	$4.3	$4.3	$4.2

OSFI’s actual spending in 2009-2010 towards its Strategic Outcome 2 was $4.2 million, $0.1 million, or 2.3%, lower than planned.  The variance is mainly due to lower Human Resources costs as a result of unexpected vacancies during the fiscal year.

The increase in actual spending of $0.6 million, or 17.4%, from the previous year is due to costs associated with hosting the 2009-2010 International Social Security Association conference, planned increases in employee compensation and an increase of 2.6 FTEs due to the full year impact of resources hired in the latter part of 2008-2009 and the return of staff temporarily struck off strength in the previous year. 

Program Activity supporting both Strategic Outcomes: Internal Services

Program Activity	2008-2009 Actual Spending	2009-2010				Alignment to Government of Canada Outcomes
		Main Estimates	Planned Spending	Total Authorities	Actual Spending
Internal Services	$34.4	$40.7	$40.7	$40.7	$37.9
Total (Millions)	$34.4	$40.7	$40.7	$40.7	$37.9

OSFI’s actual spending in 2009-2010 for Internal Services was $37.9 million, $2.8 million, or 6.9%, lower than planned. The variance is largely due to the deferral of certain information technology projects as a result of delays in procuring required software and to technical interdependencies that arose with other initiatives.

The increase in actual spending of $3.5 million, or 10.2%, from the previous year is attributed to an increase in FTEs resulting from filling approved vacancies and new positions added to enhance the Corporate Services Sector, primarily in the Finance and Information Management/Information Technology Divisions, to support the significant growth in OSFI’s staff complements in the past few years, normal economic and merit increases and a 15-basis-point increase in the Employee Benefit Plan rate. 

Contribution of Priorities to Strategic Outcomes

The table below presents a summary of status and contribution to strategic outcomes for OSFI’s operational and managerial priorities in 2009-2010.

Operational Priorities	Type	Status	Links to Strategic Outcome(s)
A. Enhanced Identification of Emerging Risks – Continue to improve OSFI’s ability to identify, monitor and report on emerging risks to federally regulated financial institutions through enhanced research, more focus on market information, comparative reviews in key areas and updates to internal processes as needed. Achievements: Continued to strengthen the design and application of OSFI’s Supervisory Framework, building on years of experience in its use. Reorganized OSFI’s Supervision sector along industry lines to better focus risk assessment across large and small financial institutions. Planned and conducted comparative reviews for: credit cards, HELOC, Alt-A mortgages, securitization, derivatives collateral management, liquidity management, stress testing and compensation. Continued close monitoring of property and casualty insurance companies with significant auto insurance exposure.	Previously committed	Successfully Met - Ongoing	Strategic Outcome 1 This priority contributes through enhancing identification, monitoring, and reporting on emerging risks to Canada’s financial system and the federally regulated financial institutions and private pension plans that operate within it.
B. Institutional and Market Resilience - Continue to participate in international discussions of key issues arising from global market turmoil, and work with FISC partners and the federally regulated financial services industry to maintain strong communications and preparedness. Achievements: Continued active participation in international forums such as the FSB, the Senior Supervisors Group, BCBS, the International Association of Insurance Supervisors (IAIS), and other organizations to assess and agree on proposals to strengthen the financial sector regulation as a result of the crisis. Organized and hosted separate College of Supervisors for two of the big five Canadian banks, in line with FSB recommendations, which brought executives from each bank together with supervisors from several jurisdictions where they do business. Participated in several international supervisory colleges, and developed information-sharing agreements with a number of host-country supervisory authorities that regulate significant foreign operations of Canadian banks and insurers. Continued to work closely with OSFI’s FISC partners to monitor the resilience of the financial sector and discuss critical issues. Developed industry guidance for stress testing building on BCBS, IAIS, and existing OSFI principles. Held three Risk Management Seminars: second annual for deposit-taking institutions; first annual for life insurance companies, and for property and casual insurance companies.	Previously committed	Successfully Met - Ongoing	Strategic Outcome 1 This priority contributes by enhancing OSFI’s ability to identify and respond to key issues arising from global economic events and developments in world financial markets, and preparedness for any domestic impacts.
C. Capital Adequacy - Continue work on current Minimum Continuing Capital and Surplus Requirements (MCCSR) and the Minimum Capital Test (MCT) to develop improved risk-sensitive capital frameworks for life and property and casualty insurers, and in light of IFRS implementation. Continue monitoring post-implementation phase of Basel II Capital Accord. Achievements: Continued to work through the MCCSR Advisory Committee (MAC) to develop and incorporate more advanced risk measurement techniques (such as internal company models) into the MCCSR. Held discussions with the life insurance MAC about possible improvements to the current internal model capital valuation methodology for segregated funds and about a fundamental review of the current valuation methodology for segregated funds requirements. Revised MCCSR Guideline in late 2009 for life insurance companies, particularly in relation to the capital treatment of unregistered reinsurance. Also issued a draft version in early 2010 to incorporate amendments related to implementation of IFRS. Continued review of MCCSR with respect to measurement of capital requirements for life insurance companies, including for mortality risk improvement. Developed conceptual frameworks for assessing solo / stand-alone capital adequacy for better evaluation of insurance holding company capital adequacy, and commenced consultations with key affected institutions. Published Key Principles for the Future Direction of the Canadian Regulatory Capital Framework for Property & Casualty (P&C) Insurance in conjunction with the Property and Casualty Minimum Capital Test (MCT) Advisory Committee. Operationalized a robust Internal Capital Adequacy Assessment Program (ICAAP) review process and related risk measurement techniques to strengthen OSFI’s ability to assess capital adequacy. Took an active role in the Basel Committee on Banking Supervision development of new rules on risk management and capital regulation, including the July 2009 changes to trading book rules and the December 2009 proposals to strengthen the resilience of the banking sector through enhanced capital, leverage and liquidity rules, and also on the development of Guiding principles for the revision of accounting standards for financial instruments issued by the Basel Committee.	Previously committed under multiple priorities	Successfully Met - Ongoing	Strategic Outcome 1 This priority contributes through increased focus on risks and their relation to the overall level of capital adequacy for FRFIs.

 

Management Priorities	Type	Status	Links to Strategic Outcome(s)
D. People - Ensure OSFI has the human resources available to fulfill its mandate, through improved long-range and integrated planning. Achievements: Applied OSFI’s Human Resources planning process to ensure key resource and skill gaps were prioritized, and action plans developed and monitored. Continued to implement and monitor training and development programs consistent with needs analyses to ensure workforce capacity and skills were in place to meet work plans. Increased the staff complement to continue to respond to external pressures and to recruit specialized skills in areas such as research, credit and capital, which included strengthening Capital Division’s ability to deal with developments such as enhanced Basel rules on bank capital adequacy and increased use of models by insurance companies. Reviewed staffing needs to address gaps moving forward with IM/IT strategy. Conducted a review, and risk assessment of OSFI’s executive compensation structure in light of the Expenditure Restraint Act. We enhanced OSFI’s business continuity and pandemic plan capacity.	Previously committed	Successfully Met - Ongoing	Strategic Outcome 1 and 2 This priority contributes by improving OSFI’s ability to attract, motivate, develop and retain employees with highly specialized knowledge, skills and experience to perform its mandate.
E. Infrastructure Enhancements - Develop long-term strategies for Information Management and Information Technology necessary to support OSFI’s evolving supervisory and regulatory activities. Achievements: Completed IM/IT Strategy outlining a multi-year roadmap to address ‘end of life’ technologies and the modernization of OSFI’s application suite to increase business value and system flexibility and agility. Implemented portfolio management and optimized governance to provide oversight and accountability over IM/IT investments and ensure alignment with OSFI plans and priorities. Commissioned a review to be undertaken in 2010-2011 of OSFI’s returns processing system, the Tri-Agency Database System, to confirm ‘end of life’ and to recommend a replacement strategy. Completed the Pension Systems Renewal project for Private Pension Plan Approvals activity. In 2010-2011, OSFI will begin development of enabling technology to support Pension Plan Supervisory processes.	New	Successfully Met - Ongoing	Strategic Outcome 1 and 2 This priority contributes by ensuring OSFI has the appropriate infrastructure (including systems and processes) to perform its mandate effectively and efficiently.
F. Changes to International Financial Reporting Standards (IFRS) - Prepare for the move to International Financial Reporting Standards (IFRS) in 2011, by determining the policy, data collection and reporting implications for OSFI. Work closely with federally regulated financial institutions to gain a clear understanding of their IFRS plans and readiness. (NOTE: This priority includes looking externally at the impact on FREs3 and internally at the impact on OSFI’s own financial reporting.). Achievements: Addressed accounting and capital policy and reporting implications of moving to IFRS. Following extensive consultations with industry associations and other key stakeholders, an Advisory on the Conversion to International Financial Reporting Standards (IFRSs) by Federally Regulated Entities (FREs) was published providing OSFI positions on accounting, capital and regulation treatments due to IFRS changes. Hosted industry risk management forums for deposit-taking institutions, life insurance companies, and property and casualty companies on the impact of IFRS on accounting and regulatory capital policies, expectations of FREs on IFRS implementation, and consequential reporting changes.  Posted draft financial and regulatory reporting forms for FREs reflecting IFRS changes. Completed the selection of IFRS accounting and reporting solutions for OSFI and completed targeted milestones to ensure effective implementation. Completed the Information Management/Information technology (IM/IT) impact assessment for OSFI as a result of the move to IFRS. Commenced consultations on OSFI guidance requiring updates to reflect IFRS.	Previously committed	Successfully Met - Ongoing	Strategic Outcome 1 This priority contributes through OSFI’s understanding of the implications of the accounting changes on its supervisory and monitoring processes, and ensuing positions on policy, process and reporting changes.

³ Federally regulated entities (FREs) is a broader category than federally regulated financial institutions (FRFIs) and includes banks, foreign bank branches, bank holding companies, federally regulated trust and loan companies, cooperative credit associations, life insurance companies, foreign insurance companies, fraternal benefit societies, property and casualty insurance companies, and insurance holding companies, all of which must implement IFRS.

Risk Analysis

The functioning of liquidity and credit markets has improved since the global financial crisis intensified at the end of 2008. Policy makers around the world have acted vigorously to restore confidence in the global financial system and promote the flow of credit but significant risks remain. The strength of the Canadian financial regulatory and supervisory framework helped Canada’s banking system weather the storm better than many global counterparts, as noted by the International Monetary Fund in its 2009 assessment of member countries. As 2009-2010 came to a close, key economic indicators in Canada pointed to recovery. Generally, the Canadian economy was less exposed to the crisis because private and public sector balance sheets were in better shape than in most countries. In addition, Canadian financial institutions benefited from relatively conservative lending and maintaining higher levels of capital.

During 2009-2010, OSFI worked with various domestic partners on the Financial Institutions Supervisory Committee (the Department of Finance, the Canada Deposit Insurance Corporation, the Bank of Canada, and the Financial Consumer Agency of Canada) to review lessons learned, and to discuss and coordinate issues related to the oversight of the financial sector.

OSFI continued active participation in international forums to develop and implement better practices. These include the BCBS, the Financial Stability Board, the International Association of Insurance Supervisors, the Joint Forum and the Senior Supervisors Group. Notably, the BCBS published consultative proposals to strengthen global capital and liquidity regulations in December 2009 with the goal of promoting a more resilient banking sector.

Throughout 2009-2010, OSFI continued the heightened level of monitoring and scrutiny of financial institutions and markets exercised in the prior year, while taking into account clear evidence of economic recovery and a decline in volatility and uncertainty in financial markets. We enhanced risk identification activities, strengthened the design and application of supervisory processes, targeted cross-sector reviews in areas identified as high risk, and introduced organizational changes to focus OSFI’s resources better.

Enterprise Risk Management

The environment within which OSFI operates presents an array of challenges to the achievement of its mandate and objectives.  While many of these challenges are consistently present, the extent to which they present a risk to OSFI’s objectives varies, depending on economic and financial conditions and the financial industry environment.  OSFI’s ability to achieve its mandate depends on the timeliness and effectiveness with which it identifies, evaluates, prioritizes, and develops initiatives to address areas where its exposure is greatest. 
  
OSFI’s Enterprise Risk Management (ERM) framework divides risks into external and internal categories. The external risk category consists of economic and financial conditions, the financial industry’s environment, OSFI’s legal environment and catastrophic events.  External risks arise from events that OSFI can potentially influence but cannot control, but must be able to monitor and react to in order to mitigate the impact.  The internal risk category consists of risks within OSFI’s control that can broadly be categorized as people, processes, systems and culture. 

OSFI’s ERM program has identified several key risks to the achievement of its mandate and objectives.  

External Risks

Global Economies and the Industry

TThe economy is recovering from recessionary conditions.  This coupled with the rapidly changing and increasingly complex financial environment both domestically and internationally continues to pose challenges for financial institutions.  Global financial events require that OSFI, like all financial sector regulators, be in a position to respond effectively to a constantly evolving economic and regulatory environment.  To ensure an effective and efficient response, OSFI continues to rely on the work of its Emerging Risk Committee and initiatives such as cross-sector reviews in high risk areas and stress testing exercises. 

International groups such as the Basel Committee and the G-20 are continuing to make recommendations for changes to regulatory frameworks. OSFI is closely participating and/or monitoring international discussions to help ensure that outcomes lead to a more resilient global financial system and are appropriate for the Canadian context.     

Domestically, OSFI is participating in discussions led by the Department of Finance regarding the adaptation of the G-20 recommendations. 

Capital Adequacy

OSFI continues its assessment and update of the Minimum Continuing Capital and Surplus Requirements (MCCSR) and the Minimum Capital Test (MCT) to reflect lessons learned from the financial turmoil and to take account of the direction of international efforts such as those of the International Association of Insurance Supervisors (IAIS) to develop new capital guidance.  As Canada has been at the forefront of insurance regulation, adjustments to the MCCSR and the MCT are necessary to ensure that Canada’s capital rules remain effective and among the international leaders in this field.  In 2009-2010, OSFI continued to participate in a number of IAIS initiatives including the development of a Common Assessment Framework for internationally active insurance groups.

Initiatives mandated by the G-20, coupled with the market events of 2008-2009, have required more focus on the measurement of risks and their relation to the overall level of capital adequacy.  As a result, the BCBS introduced proposals in July and December of 2009 to strengthen the resilience of the global banking system to future stress. The proposals feature a combination of measures such as introducing standards for liquidity buffers that can be drawn down in periods of stress, strengthening the quality of bank capital, improving the risk coverage of the capital framework and introducing a non-risk based supplementary measure. During 2009-2010, OSFI worked actively with BCBS regulators and Canadian banks to assess the combined impact of the BCBS proposals. As well, OSFI engaged in international dialogues on the merits of Financial Stability Board sponsored initiatives on the use of capital buffers to lean against excessive credit growth and asset price bubbles. OSFI has fully briefed the Bank of Canada and Department of Finance on these developments to facilitate coordination of their efforts at maintaining the elements of the Canadian system that proved strong during the financial crisis.

Accounting

Canada is adopting International Financial Reporting Standards (IFRS) in 2011.  As a reliance-based regulator, it is critical that OSFI understands the implications of changes to financial statements to perform accurate risk assessments of financial institutions.  OSFI continues to assess the effects on institutions of the move to IFRS and it continues to work closely with national and international organizations to present its views on these issues. 
 
OSFI continues working with the financial institutions that it regulates to ensure that they are ready to adopt the International Financial Reporting Standards. 

In fall 2009, OSFI hosted industry information sessions and numerous consultations were held with key stakeholders throughout 2009-2010 to facilitate consultations and information sharing.  OSFI continues to receive biannual IFRS Progress Reports from institutions in order to monitor industry "readiness" as well as industry impacts.  A key OSFI IFRS Advisory on OSFI's expectations and requirements on the conversion to IFRSs was released in March 2010.  More recently draft revisions to OSFI core accounting guidelines were posted for comment.

Pension Environment

Financial challenges continued throughout 2009 for private pension plans, along with intensive public debate about retirement income issues. Going into 2010, markets recovered some of their 2008 losses, but long-term interest rates remained low. Nevertheless, at year-end 2009, the solvency position of federally regulated defined benefit pension plans had improved modestly from the record lows of year-end 2008.

The global financial market turmoil of 2008 and economic slowdown that followed drew attention to the pressures on pension plans in a volatile environment. The Government of Canada responded with both temporary funding relief for defined benefit plans and a country-wide consultation on enhancing the legislative and regulatory framework for federally regulated private pension plans. This consultation led to the October 2009 announcement of reforms to the framework, and the subsequent tabling in Parliament of a number of amendments to the Pension Benefits Standards Act, 1985 (PBSA) in late March 2010. 

Continuing uncertainty in the environment highlighted the importance of effective risk management by pension plan administrators. Accordingly, in 2009 OSFI surveyed a number of pension plans about their stress testing practices.

In an innovative effort to remain responsive to stakeholders, OSFI held its first pension industry forum in Toronto in February 2010. Over 120 plan administrators and other pension professionals attended. Participant evaluation of this forum was both positive and useful, and will help guide future communications with the industry.

Internal Risks

People Risks

Given the increasing complexity and volatility of the economy, OSFI must have employees with highly specialized knowledge, skills and experience to ensure effective regulation and supervision of financial institutions.  During the past year OSFI focused on increasing the number of staff with special knowledge of accounting, modelling, credit, market and operational risks, and continued to recruit and reassign staff to fill any identified gaps.  In addition, market conditions, normal turnover and retirement rates mean that a continuous learning environment is necessary to enable employees to meet the challenges of the constantly changing environment.  Attracting, motivating, developing and retaining skilled staff is and will continue to be a top priority for OSFI.  OSFI continued targeted recruitment strategies in 2009-2010, including significant hiring in the Supervision sector in Toronto.

Aging Systems

As is the case in many government departments, OSFI’s IM/IT systems are aging. An IT governance approach has been agreed to and an IM/IT strategy has been developed to address broad based risks associated with our IT infrastructure. The nature of the potential risk has, as a result, shifted away from planning/strategy development to implementation. Initiatives are well underway to upgrade key systems, such as those which support Pension supervisory efforts. These initiatives will be implemented over the next few years through a risk-based implementation plan.

Expenditure Profile

The table above presents a five year trend of OSFI’s planned and actual spending, and actual full-time equivalents (FTEs).  OSFI’s human resources costs typically account for approximately 75% of its spending, which explains the correlation between the spending and FTE trend lines.  In the latter half of 2006-2007, OSFI focused aggressively on filling vacancies and added resources in support of the new Capital Adequacy Framework (Basel II Capital Accord), Anti-Money Laundering/Anti-Terrorist Financing activities, international work on conceptual changes to accounting standards, and in the Private Pension Plans area.  During 2007-2008, OSFI increased its FTEs by 2.9% from the previous year in order to direct more resources on enhanced identification of emerging risks and on monitoring institutional and market resilience in response to the prevailing global economic and financial market events.  OSFI further increased its staff complement by 4.6% in 2008-2009 to focus more effort on higher risk institutions and products, and the early detection of problem loan portfolios.  OSFI strengthened its workforce in light of the continuing turmoil by hiring employees with current industry experience and special knowledge of credit, market and operational risks. In 2009-2010, OSFI’s FTEs increased by 10.4% driven by the full year impact of new resources hired during the previous year and due to new positions added to enhance the Corporate Services Sector, primarily in the IM/IT and Finance Divisions, to support the significant growth in staff complement in the past few years and the early hire of supervisory resources previously planned for 2010-2011.

OSFI’s total actual spending rose by 3.1% in 2006-2007, 1.4% in 2007-2008, and 5.9% in 2008-2009. During this period, OSFI also completed several major enabling technology projects in support of information management, Basel II, enhanced reporting and analytics (business intelligence), and commenced in 2006-2007 the first phase of its Pensions Processes and Systems Renewal Initiative.  The first phase was largely completed during 2008-2009.  The second phase of this project began in 2009-2010 and is expected to be completed in 2011-2012. Total spending in 2009-2010 increased by 11.2% over the prior year.  The increase is attributed to a 10.4% increase in FTEs, normal economic and merit increases in employee compensation and the 15-basis-point increase in the Employee Benefit Plan rate as prescribed by TBS.

Voted and Statutory Items

(Dollars)

Vote # or Statutory Item (S)	Truncated Vote or Statutory Wording	2007-08 Actual Spending	2008-09 Actual Spending	2009-10 Main Estimates	2009-10 Actual Spending
30	Operating expenditures	$602,927	$581,726	$872,555	$938,824
Total		$603	$602,927	$581,726	$872,555

This table summarizes Parliament’s voted appropriations, or funds, to OSFI.  OSFI receives an annual parliamentary appropriation pursuant to section 16 of the OSFI Act to support its mandate relating to the Office of the Chief Actuary. 

In 2009-2010, OSFI was granted $872,555 (2008-2009: $853,001) in the Main Estimates. Subsequently, OSFI was granted an additional $52,689 related to adjustments for collective agreements, bringing the total parliamentary appropriation to $925,244. This appropriation is to defray the expenses associated with the provision of actuarial services to various public sector employee pension and insurance plans, including the Canadian Armed Forces, the Royal Canadian Mounted Police, the federally appointed judges and Members of Parliament. Additionally, OSFI participated in the federal government program to enhance student employment in the public service and was granted an amount of $13,580 (bringing the total year appropriation to $938,824) to help cover the costs of hiring additional students into the organization. On the accrual basis of accounting, OSFI fully utilized its appropriation in fiscal year 2009-2010. 

The actual spending in the table above is calculated using a modified cash basis of accounting, in accordance with Treasury Board’s Guide to the Preparation of Part III of the Estimates and the Receiver General’s Public Accounts Instruction Manual.  OSFI, however, operates on a full accrual accounting basis according to Canadian Generally Accepted Accounting Principles (GAAP) for publicly accountable Canadian reporting entities.  This difference in accounting bases gives rise to variances between OSFI’s use of funds and appropriated funds.

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