Last week, OSFI released its Semi-Annual Update for 2023 financial system risks. While the nine financial system risks OSFI previously outlined this spring remain, OSFI has noted a continuing shift in the risk environment. The most significant developments are a domestic inflation rate that remains above the Bank of Canada’s target rate, the resulting monetary policy tightening and elevated interest rate environment, and signs of weakening credit quality, particularly in the commercial real estate (CRE) market. 

OSFI Mandate 

The 2023 Budget Implementation Act expanded OSFI’s mandate to ensure FRFIs protect themselves against threats of integrity or security, including foreign interference. FRFIs will be required to establish and adhere to such policies and procedures by January 1, 2024. To that effect, OSFI will launch new regulatory guidance.  

Commercial Real Estate Environment 

OSFI considered commercial real estate environmental risk to be higher than in April. This is in part due to the increased use of “participation” agreements and other co-lending arrangements, such as layering in other subordinated debt arrangements whereby the risk is tranched between multiple lenders and entities. In response, OSFI released interim regulatory guidance on September 29, 2023, to reinforce CRE supervisory expectations.  

Residential Real Estate 

OSFI communicated that the results of the B-20 Guideline Consultation are set to be released on Monday, October 16^th. OSFI signaled that while it considered Loan-to-Income ratios in the B-20 consult, as other jurisdictions have used, it will not implement these measures in the updated guideline. OSFI stated that it seeks an “integrated set of common-sense protections” that will work effectively in both high and low-rate environments. OSFI will also revisit the minimum qualifying rate (MQR) on December 12, as is their annual practice, and has undertaken action to account for trends in negative amortization through adjustments to the CAR/MICAT.  

New OSFI Consultations 

OSFI announced the launch of two consultations on Friday, October 13th: A revised E-21: Operational Risk Management Guideline and a new Integrity and Security Guideline. CCUA will provide more updates in the next newsletter.