The enhanced supervisory rules of Canada’s big banks can be categorized as outside rules and inside rules, with a focus on banking behaviours, said the Deputy Ontario Superintendent of Financial Institutions.
Speaking to the Autorité des marchés financiers at the Adapting to a New Reality conference in Montreal, Que. yesterday, OSFI deputy Andrew Kriegler drew attention to the enhanced supervision of the big six banks.
“I often group the regulatory guidelines we supervise against in a different way than you would find if you were to search OSFI’s website,” said Krieger. “There, they are listed by subject — from capital adequacy to prudential limits and accounting, through to sound business and financial practices.
That is logical of course, but my own informal approach tends to put them into two over-arching categories: outside rules and inside rules.”
An example of the outside rules is the Basel III agreements for risk-based capital, liquidity and leverage, said Kriegler.
“To me, these international standards epitomize outside rules. They are quantitative, measureable and objective; and importantly, how well banks live up to them will be visible,” he said. “They exist to ensure that banks have enough capital, to ensure they can measure capital and liquidity appropriately and consistently, and perhaps even more importantly, to show the markets that they can and they do take these steps.” (continued.)
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OSFI will release for public consultation its implementation guidance for the Basel liquidity standards in the coming weeks, Kriegler said, as a complement to the liquidity risk principles previously published in Guideline B6.
“The new document will also include updates to the Net Cumulative Cash Flow (NCCF),” he said. “These enhancements will allow us to look at how institutions’ liquidity would evolve under stresses of varying severities, particularly given the business models of each institution. It will also include consistent stress assumptions and behaviours for how different assets and liabilities react under those stresses.”
In contrast, Kriegler added, inside rules have a slightly different emphasis.
“Consider OSFI’s corporate governance guideline, for which we expect full compliance by early 2014,” said Kriegler. “Just as with capital and liquidity standards, it is important that governance principles be visible, for stakeholder confidence in institutions’ governance supports confidence in the institutions themselves. Governance is however only partially quantitative, a challenge to measure and a further challenge to make truly visible.
“That is perhaps why I draw a distinction between outside rules that have a little more emphasis on showing stakeholders the standards to which institutions are being managed,” he said, “and inside rules that have more emphasis on how the institutions are managing themselves, on their behaviours and attitudes.” (continued.)
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Kriegler offered two examples of our current and upcoming supervisory efforts, and their focus on behaviours; on how institutions are living the inside rules.
“The Basel III liquidity coverage ratio (LCR), for those unfamiliar with it, is a measure of an institution’s liquidity under stress. It is, essentially, the quantity of a bank’s available liquidity divided by how much it will need over the 30 days after the onset of a fairly severe stress,” he said. “It will be complemented ultimately by another Basel measure, the Net Stable Funding Ratio, or NSFR, which looks at the structural liquidity of institutions’ balance sheets, but measured at the one-year point. The NSFR is still the subject of international discussion.”
Kriegler pointed out that the LCR is a good measure and allows for international comparability, but it stops at 30 days.
“The NSFR is not finalized yet, and won’t come into force for a number of years and is more of a structural measure in any case,” he said. “And so, for a number of years, OSFI has used a supervisory measure known as the NCCF to monitor the term structure of banks’ liquidity profiles, at various points between one week and one year.”
And increasingly, OSFI will place more scrutiny on behaviours and risk culture, and not just following the rules.
“There is an increasing focus of OSFI’s supervisory efforts on behaviours, on risk culture, and not just on rules being followed,” said Kriegler. “We believe doing so not only leverages scarce supervisory resources but focuses them where they will best help boards of directors and senior management to identify and manage risks being undertaken by their financial institutions.”
