Canada’s Banking Regulator Proposes Rules on Non-Financial Risk

Canada’s banking regulator published new draft rules on Friday aimed at stemming foreign interference and other non-financial risks to the country’s banking system.

(Bloomberg) — Canada’s banking regulator published new draft rules on Friday aimed at stemming foreign interference and other non-financial risks to the country’s banking system.

Prime Minister Justin Trudeau’s government recently gave the Office of the Superintendent of Financial Institutions new powers to ensure that Canada’s large banks have procedures in place to guard against threats such as hacking, fraud, money laundering and terrorism financing. 

With the publication of two new guidelines Friday — one on integrity and security, and a revision of an existing policy on operational risk management — OSFI is pushing further beyond its traditional role of regulating “prudential,” or financial, risks. That has historically involved rules around banks’ capital and liquidity management, but the regulator now sees a range of other factors that could also destabilize the banking system. 

Non-financial risks “have been growing and we, as a regulator, have been responding,” OSFI Assistant Superintendent Tolga Yalkin told reporters during a media briefing Friday, citing forces such as climate change, cryptocurrencies and artificial intelligence.

The draft rules, which OSFI hopes to finalize next year after public-comment periods, also address issues including the character of board members and management, governance, and controls around physical premises, data and technology systems.

Yalkin said he recognizes that banks have concerns about the growing cost of compliance and that OSFI holds regular talks with industry groups and took the issue of regulatory burden into account in drafting the new rules.   

OSFI Superintendent Peter Routledge first announced that new rules on non-financial risks were coming during a speech in Toronto last month. 

“When one considers foreign-interference risk, we need to understand that Canada’s banks are not immune to threats from potential hostile actors,” Routledge said. While OSFI doesn’t see widespread evidence of this in the financial system, the regulator’s “mandate is to remain vigilant and act early,” he said.

In a separate announcement Thursday, OSFI warned that elevated borrowing costs are a growing risk to Canada’s financial system, pointing to housing and commercial real estate as top vulnerabilities. 

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