OSFI chief warns of digital asset risks and outlines AI and capital-rules stance
Canada’s federal banking regulator is open to innovation, but only within a framework that ensures resilience.
In a fireside chat at Morningstar DBRS’s event in Toronto last week, Office of the Superintendent of Financial Institutions superintendent Peter Routledge began by addressing the rapid growth of digital assets, noting that while the US is forging ahead, Canada is exercising caution. He gave the example of stablecoins.
“It’s important to remember: stablecoins are not really ‘assets’ — they are liabilities,” he said. “They are promises that have to be backed, and those promises carry prudential risks. Some products may be inside the regulated perimeter, others outside it.” He emphasized that resilience is stronger when innovation takes place within regulation.
Turning to the regulator’s role, Routledge stressed that it does not aim to steer innovation among financial institutions, but to safeguard the system.
“Our role is to promote safety and soundness, while allowing federally regulated banks to compete and take reasonable risks,” he explained. “But we need to keep the door open to innovation. If Canada falls behind in financial sector innovation, we risk falling behind economically. The better path is responsible innovation inside the regulated perimeter.”
On the subject of artificial intelligence, Routledge described it as a “productivity multiplier” for both regulated entities and OSFI itself and that, similar to the internet, it will rapidly change how financial services operate.
“A poorly managed AI model, especially one used in critical decision-making, could even contribute to an institution’s failure. That’s why governance, oversight, and accountability are so important,” he said.
The OSFI chief outlined four pillars of OSFI’s approach - Explainability, Data, Governance and Ethics -collectively known by the acronym “EDGE”.
Addressing the balance between prudence and competition, Routledge referenced the recently deferred increases to the Basel III output floor, noting the decision allows Canadian banks to “compete effectively … without weakening safeguards.”
He added that upcoming consultations on the draft Capital Adequacy Requirements Guideline will consider relative risk-weightings and business lending support.
On housing, Routledge spoke of the pilot loan-to-income measure introduced in January.
“The pilot will run for a full year so that we can assess its impact in a range of market conditions. So far we like what we are seeing,” he said, noting that that while housing affordability falls outside OSFI’s direct mandate, the regulator is committed to having federally regulated lenders manage mortgage-lending risk appropriately.
Finally, he reviewed the agency’s top risk categories, integrity and security, wholesale credit, funding and liquidity, and real-estate-secured lending. He warned that “the risks we are observing are highly consequential. We do not anticipate them easing; in fact, their severity continues to intensify.”
Overall, the superintendent said that Canada’s federally regulated financial institutions remain “very resilient” and that this resilience is a strategic advantage.
