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Message from the Superintendent

The global financial crisis has demonstrated the benefits of strong prudential regulation and supervision, and strong risk management at financial institutions and pension plans.

The Office of the Superintendent of Financial Institutions (OSFI) is tasked with overseeing the solvency of federal financial institutions in the interest of depositors and policyholders, and protecting members in private federal pension plans.

While financial markets have stabilized, risk and uncertainty in the global economy persists, and this is expected to have a continuing impact on the financial institutions and pension plans subject to OSFI oversight. Under the duress of recent events, we discovered that the strength of the Canadian financial system is due to Canada's overall policy framework, the quality of OSFI's supervision and regulation, the level of cooperation and communication among Financial Institutions Supervisory Committee (FISC) partners (OSFI, the Bank of Canada, the Canada Deposit Insurance Corporation, the Financial Consumer Agency of Canada and the Department of Finance) and the risk management skills of Canada's financial institutions.

As knowledge sharing is an important element of robust risk management, in the coming year OSFI will continue its annual risk management seminars for Chief Risk Officers of banks and insurance companies to communicate our expectations, to share best practices and developments, and to provide an opportunity for dialogue with OSFI supervisors and regulators. We will continually adjust operations to address emerging issues (such as expanding stress testing, and addressing risk associated with compensation plans, governance and information management systems at financial institutions). In the increasingly interconnected world of global finance, supervisory colleges (including “living wills”) provide an opportunity for information sharing and dialogue between some of Canada's major financial institutions and the host regulators of countries in which these institutions do business. The first Financial Stability Board-sanctioned college took place in February 2009, with a number of key global supervisors of the Royal Bank attending. Similar Colleges are planned with other leading institutions in 2010.

OSFI will also continue to be active internationally with fellow members of the Basel Committee on Banking Supervision (BCBS) and the international Senior Supervisors Group. We will participate in meetings of the Financial Stability Board and the International Association of Insurance Supervisors. These forums are increasingly important as they represent a way to enhance communication with international peers on the day-to-day challenges that arise in the global banking system. Areas under review in these international groups will include the need to develop a strengthened capital framework, enhanced oversight of liquidity, research in relation to systemic risk and systemically important institutions, markets and instruments, and the need to shine more light onto unregulated parts of the financial system.

This 2010–2011 Report on Plans and Priorities notes several areas where OSFI will focus. Through these initiatives, OSFI will play its part in contributing to a strong domestic financial system, one in which Canadians can place their trust.

Section I – Agency Overview

1.1 Summary Information

Raison d'être

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.

OSFI's prudential mandate supports a safe and sound Canadian 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

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

Program Activity Architecture

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]

Program Activity Architecture Crosswalk

OSFI's PAA was updated in May 2009, in order to articulate with greater precision the agency's long-term commitments, and the resulting enduring benefits to Canadians that stem from OSFI's mandate. While the structure of the PAA has not been altered, the following changes were included in this update:

• Name changes for Strategic Outcomes and Program Activities to improve the clarity of OSFI's programs and align their naming convention more closely to the definition stated in the Treasury Board Secretariat's Policy on Management, Resources and Results Structure.
• Description changes for Strategic Outcomes and Program Activities to improve the overall description of, and clarify the rationale for, the program activity and/or sub-activity.
  

1.2 Planning Summary

Financial Resources ($ millions)

2010-11	2011-12	2012-13
$109.2	$123.3	$116.7

The financial resources table above provides a summary of the total planned spending for OSFI for the next three fiscal years.¹

Human Resources Full-Time Equivalents (FTEs)

2010-11	2011-12	2012-13
543	544	544

The human resources table above provides a summary of the total planned human resources for OSFI for the next three fiscal years.

¹ Additional information regarding the Financial and Human Resources trends can be found in the Expenditure Profile section of this report.

Strategic Outcome 1: A safe and sound Canadian financial system.

Performance Indicators	Targets
% of knowledgeable observers2 that rate OSFI as somewhat or very effective in monitoring and supervising their institution or pension plan.	70%
Percentage of estimated recoveries on failed institutions (amount recovered per dollar of claim).	90%
Percentage of estimated recoveries on pension plans that have terminated under-funded.	85%
Percentage of respondents3 that rate the assistance / presentations provided as relevant to their work.	80%

Program Activity	Expected Results	Forecast Spending ($ millions)	Planned Spending ($ millions)			Alignment to Government of Canada Outcomes
		2009-10	2010-11	2011-12	2012-13
Regulation and Supervision of Federally Regulated Financial Institutions	Protect depositors and policy holders while recognizing that all failures cannot be prevented.	52.9	54.6	56.5	58.5	Strong economic growth A safe and secure world through international co-operation
Regulation and Supervision of Federally Regulated Private Pension Plans	Protect the financial interests of federally regulated private pension plan members and beneficiaries.	4.6	5.3	5.3	5.1	Strong economic growth Income security for Canadians
International Assistance	Emerging market economies are more informed about current approaches to regulatory and supervisory systems, and deploy them to the extent possible.	1.7	1.6	1.7	1.8	Strong economic growth A safe and secure world through international co-operation
Total for SO 1		59.2	61.5	63.5	65.4

² Senior Executives, Plan Administrators, and professionals who act on behalf of federally regulated financial institutions and pension plans.

³ Foreign regulators who receive technical assistance from OSFI's International Advisory Group.

Strategic Outcome 2: A financially sound and sustainable Canadian public retirement income system.

Performance Indicators	Targets
Panel of Canadian peer actuaries selected by an international and independent body attest that the Chief Actuary and staff have adequate professional experience, complete work in compliance with professional standards and statutory requirements, access adequate information and complete relevant data tests and analysis, use reasonable methods and assumptions in completing actuarial reports and that these reports fairly communicate the results of the work performed.	Unanimous agreement
Adequacy of professional experience of the Chief Actuary and staff. AND/OR Compliance with Canadian and international professional standards.	Unanimous agreement Unanimous agreement

Program Activity	Expected Results	Forecast Spending ($ millions)	Planned Spending ($ millions)			Alignment to Government of Canada Outcomes
		2009-10	2010-11	2011-12	2012-13
Actuarial Valuation and Advisory Services	Stewards of Canada's public retirement income system are provided with independent, accurate, high quality and timely professional actuarial services and advice.	4.2	4.3	4.2	4.4	Income security for Canadians
Total for SO 2		4.2	4.3	4.2	4.4

Contribution of Priorities to Strategic Outcomes

Operational Priorities	Type	Links to Strategic Outcome	Description
Enhanced Identification of Emerging Risks	Ongoing	SO 1	Continue to: improve our ability to identify, monitor and report on emerging risks including system-wide risks that may have a material impact on Canadian financial institutions, via enhanced international and domestic monitoring, and research and intelligence gathering; update and implement changes to the Supervisory Framework; refine the monitoring of risks facing pension plans, including the impact of rule changes, and adjust supervisory processes as warranted; perform selected comparative reviews of FRFIs in key risk areas. Implement enhanced liquidity assessment and monitoring practices.
Institutional and Market Resilience	Ongoing	SO 1	Internationally, continue to participate in discussions (such as the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the International Association of Insurance Supervisors, and Senior Supervisors Group) to identify and respond to the key issues arising from global financial events, including future changes to regulatory approaches and requirements, and to make recommendations for action. Domestically, continue work with FISC partners and the regulated industries on similar issues in the Canadian context. Maintain strong communications on, and continue to promote improved risk management practices including: stress testing methodologies, executive compensation practices, liquidity management, and corporate governance in institutions, in order to strengthen individual Federally Regulated Financial Institution (FRFI) preparedness and overall market resilience.
Capital Adequacy	Ongoing	SO 1	Continue to: actively participate in international fora (BCBS, G20, and FSB) to contribute to the development of internationally agreed bank capital standards; review and improve domestic regulatory capital requirements and assessment practices through steps such as stress testing and implementing guidance agreed at the international level while taking into account identified emerging risks; enhance risk sensitivity of capital requirements in the insurance sector.
Management Priorities	Type	Links to Strategic Outcome	Description
People	Ongoing	SO 1 & SO 2	Identify changing human resources requirements to ensure timely availability of qualified staff and the assignment of these resources based on identified risks and priority areas; implement strategic learning and development (training) plans.
Infrastructure Enhancements	Ongoing	SO 1	Implement the long-term strategies and related governance for Information Management and Information Technology necessary to support our evolving supervisory and regulatory activities. Implement the accommodation plan for OSFI's Toronto office.
Changes to International Financial Reporting Standards (IFRS)	Ongoing	SO 1	Implement the move to International Financial Reporting Standards (IFRS) by assessing the impact on Federally Regulated Financial Institutions and pension plans, and addressing implications to OSFI's prudential regime and regulatory policies and changes to regulatory returns.

Risk Analysis

Enterprise Risk Management

The environment in which OSFI operates presents an array of risks 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-wide Risk Management (ERM) framework divides risks into external and internal categories. The external risk category consists of economic and financial conditions, the financial industry environment, OSFI's legal environment and catastrophic events. External risks arise from events that OSFI cannot influence, but must be able to monitor and respond to in order to mitigate the impact. The internal risk category consists of risks that can broadly be categorized as people, processes, systems, and culture.

Economic, Industry and Regulatory Environment

The Canadian economy is recovering after a sharp contraction in economic activity that began in the middle of 2008, such contraction being preceded and followed by a number of significant international financial shocks. The resumption of growth in the second half of 2009 is supported by monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices, and stronger business and consumer confidence according to the Bank of Canada. Recent indicators also point to the start of a global recovery.

The Canadian economy has benefited from well-capitalized and well-diversified financial institutions. According to a recent Standard & Poor's survey, Canadian banks rank among the world's strongest in terms of capital adequacy. Future growth in the economy will depend, to a certain extent, on the strength of these institutions as the recovery takes hold at the same time as significant industrial restructuring is taking place in the economy.

In recent months, a risk related to the global competitiveness of the Canadian economy has materialized. The Canadian dollar has strengthened significantly, and become more volatile, reflecting both uncertainty about the long-term value of the U.S. dollar and an increase in commodity prices. The current strength in the Canadian dollar could offset any favourable developments at this early stage of recovery given the strong trade links between Canada and U.S. economies.

A number of keys sources of risk to the strength and stability of the financial system are noted in the December 2009 Bank of Canada Financial System Review, including the following:

• In the early stages of a recovery, a negative global (financial or economic) shock, or a loss of investor confidence, could re-ignite funding and liquidity pressures.
• The ability of households to service their debt obligations in the context of continued growth in credit and an environment of rising interest rates is an emerging source of risk for the medium term.
• Economic growth is likely to remain subdued for some time and there remains considerable uncertainty about how long it will take for a return to self-sustaining growth in private demand⁴. The risk of a renewed decline in economic growth also remains a key risk.
• There is a risk that the fluctuations in exchange rates that are necessary to address global imbalances (i.e., large and unsustainable current account imbalances) over time are disorderly. Increasing concerns about the sustainability of fiscal positions in several countries is a potential emerging source of risk over the medium term that could hinder this adjustment.

⁴ Private demand includes consumption/investment/net-exports expenditure (e.g., spending/purchases) and excludes government expenditure.

OSFI's ERM process has identified several key risks to the achievement of its mandate and objectives, as follows:

External Risks

Global Economies and the Industry

As previously mentioned, the risks posed by the current environment (both at the level of the economy and within the financial sector, and taking into account ongoing global responses) continue to be of concern. Global financial events require that OSFI, like all financial sector regulators and supervisors, must be in a position to respond effectively to a constantly evolving economic and regulatory environment. On a micro-level, prevailing conditions continue to put pressure on the Capital and Accounting Policy Divisions to provide interpretations or to reassess existing guidance to ensure its effectiveness under stressful and evolving conditions. Specific strategies have been put in place within individual Divisions, consistent with specialized responsibilities and current projects, to address ongoing industry developments. Resources continue to be reassigned and priorities realigned as necessary.

Capital Adequacy

Work is underway in many countries and in international fora to develop more risk-sensitive capital frameworks for insurance companies as both companies and regulators recognize the need to have more risk sensitive approaches that better reflect the issues arising from increasingly complex products and dynamic markets. As a result, there is a need to improve the risk sensitivity of the Minimum Continuing Capital and Surplus Requirement (MCCSR) and the Minimum Capital Test (MCT), as well as to incorporate changes due to IFRS, while maintaining the integrity of the existing capital tests.

Impending changes to the Basel capital framework for banks and the need to update prudential regulatory frameworks to address recent market events also require banks and regulators to focus more on the measurement of risks and its relation to the overall level of capital adequacy, leverage and liquidity. Due to the breadth of change and the novelty of certain measures, there is a risk that the review, consultation and implementation of these changes will require more resources than expected by both financial institutions and OSFI. It is expected that policies creating OSFI's current prudential framework will have to be updated to incorporate new issues, information and lessons learned from the times of stress.

Internal Risks

People Risks

OSFI's success is dependent upon having employees with highly specialized knowledge, skills and experience to regulate and supervise financial institutions, identify significant issues, and perform accurate risk assessments. OSFI is also being called on to take an increasing leadership role domestically and internationally and to devote resources to further improving financial regulation and considering systemic issues.

A volatile global economy, increasingly complex products, changes to prudential regulation and emerging risks in the industry also mean that OSFI needs to be able to attract, motivate, develop and retain skilled people, particularly those whose skills are in demand in the financial sector. In addition, a significant increase in hiring over the last two years due to market conditions, and normal turnover and retirement rates mean that a continuous learning environment is necessary to enable employees to meet the challenges of this constantly changing environment. Not having sufficient skill sets in place can result in an over reliance on certain key resources, which can have stress-related implications.

Systems Risks

Enabling technology and a robust, secure and well-supported Information Technology (IT) infrastructure are key success factors to OSFI in meeting its mandate. OSFI must ensure that the necessary information systems and infrastructure are in place to effectively support its supervisory and regulatory activities. As an IM/IT strategy has now been developed that addresses governance related issues, the risk now shifts to implementation of the strategy. Accordingly, implementation issues need to be closely monitored and evaluated.

Changes to International Financial Reporting Standards

The Canadian Accounting Standards Board has decided to adopt IFRS in 2011. This will have an impact both on OSFI, as it relies on audited financial information, and the institutions it regulates. Further, key accounting changes proposed by the International Accounting Standards Board (IASB) will impact FRFIs and OSFI – including matters such as accounting for insurance liabilities, off balance sheet vehicles (de-recognition and consolidation), loan impairment, financial instruments, measurement of fair value and financial statement presentation. As a reliance-based regulator, it is crucial that OSFI understand and, when practicable, influence such changes so that OSFI will continue to be able to perform accurate risk assessments of financial institutions and will be able to adjust its regulatory capital framework as required.

Expenditure Profile

In accordance with the Treasury Board Secretariat's Guide to the Preparation of Part III of the 2010-2011 Estimates, the financial and human resources presented in this Report on Plans and Priorities reflect OSFI's approved Annual Reference Level Update (ARLU) estimates, which were prepared in early summer 2009. OSFI continues to apply lessons learned from the global financial crisis and focus its regulatory and supervisory resources on key risk areas. During the 2010-2013 planning period, OSFI will continue to improve its ability to identify, monitor and report on emerging risks including system-wide risks that may have a material impact on Canadian financial institutions. To address new and emerging issues and to improve its prudential regulatory framework and practices, OSFI will also continue to actively participate in international fora to represent Canada's interests and to contribute to the development of internationally agreed regulatory standards, and to improve OSFI's domestic prudential regulatory requirements and risk assessment practices. OSFI will devote significant resources in promoting improved risk management practices including: risk identification and capture, capital adequacy, stress testing methodologies, executive compensation practices, liquidity management, and corporate governance in institutions. Accordingly, increases to the resource levels presented in these tables are likely, particularly in the Regulation and Supervision of Federally Regulated Financial Institutions program activity where expertise in critical technical skills to deal with the issues outlined above may be required. At the time of writing this Report on Plans and Priorities, OSFI was completing its business planning process for fiscal years 2010-2011 to 2012-2013. Any changes as a result will be reflected in next year's Report on Plans and Priorities.

($ millions except for  percentages)	Actual Spending	Forecast Spending	Planned Spending
	2008-09	2009-10	2010-11	2011-12	2012-13
Gross Expenditures	90.8	105.3	109.2	123.3	116.7
Change from previous year		15.9%	3.7%	12.9%	(5.4%)
Less:
Respendable Revenue	90.2	104.4	108.3	122.4	115.8
Total Planned Spending	0.6	0.9	0.9	0.9	0.9

Total gross expenditures in 2009-2010 of $105.3 million are forecasted to increase by 15.9% from the previous year, due primarily to the increase in human resources and the full-year impact in 2009-2010 of employees hired during 2008-2009 (which in combination result in a growth of 64 full-time equivalents), normal inflationary and merit adjustments and continued annual investments in information systems related to the Private Pension Plans program, annual systems updates and renewal of core infrastructure and selected applications.

Total gross expenditures in 2010-2011 of $109.2 million are planned to increase by 3.7% over 2009-10 forecast, mainly due to an increase of 2.3% in full-time equivalents and normal inflationary and merit adjustments. In 2011-2012, OSFI is planning an accommodation upgrade in Toronto in conjunction with the expiry of its lease. This will allow OSFI to utilize its space more efficiently and align its accommodation standards more closely to those established by Public Works and Government Services Canada. The decrease in 2012-2013 is largely due to the completion of the accommodation upgrade in the preceding year, partially offset by increases associated with normal inflationary and merit adjustments.

Net of Respendable Revenues, total planned spending is $933 thousand for each of the planning years. This amount is assumed to remain unchanged over the planning horizon but may be adjusted by Treasury Board Secretariat to reflect changes in collective agreements.

The table below provides a trend of OSFI's actual and planned expenditures and full-time equivalents (FTEs) over the fiscal years 2005-2006 to 2012-2013. The growth in FTEs that began in late 2007-2008 through to 2009-2010 was driven by the global financial market turmoil, which began in August 2007, and the serious economic downturn in the following year while financial market turmoil still prevailed. During this period, OSFI added staff in specialized areas in order to more intensely monitor and assess risk in the financial sector.

OSFI continues to re-evaluate its programs to ensure that they contribute to OSFI's mandate and are efficiently managed. In so doing, OSFI has been successful at minimizing ongoing operating cost increases and at judiciously managing its human resources in optimal ways.

Voted and Statutory Items

Vote # or Statutory Item (S)	Truncated Vote or Statutory Wording	2008-09 Main Estimates ($ millions)	2009-10 Main Estimates ($ millions)
30	Program Expenditures	0.9	0.9
(S)	Spending of revenues pursuant to subsection 17(2) of the Office of the Superintendent of Financial Institutions Act (OSFI Act)
Total		0.9	0.9

This table summarizes Parliament's voted appropriation and OSFI's statutory provision for the spending of any revenues arising out of its operations, pursuant to subsection 17(2) of the OSFI Act.

OSFI receives an annual parliamentary appropriation pursuant to section 16 of the OSFI Act to support the Office of the Chief Actuary. This parliamentary appropriation is to defray the expenses associated with the provision of actuarial services relating to various public sector employee pension and insurance plans, including those for the Canadian Armed Forces, the Royal Canadian Mounted Police, the federally appointed judges and Members of Parliament.

For fiscal year 2010-2011, this appropriation is set at $933 thousand and is currently assumed to remain unchanged in both 2011-2012 and 2012-2013; however, it may be adjusted by Treasury Board Secretariat to reflect changes in collective agreements.

OSFI also continues its participation in the Budget 2009 initiative to enhance federal public service student employment. This program provides partial funding to departments and agencies to promote the hiring of additional students into the federal public service. OSFI was granted $14 thousand for this initiative in both 2009-2010 and 2010-2011.

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