OSFI defends scrutiny of ‘non-financial’ risks
Peter Routledge pushed back on criticism that his Office of the Superintendent of Financial Institutions is using new regulation to dictate the culture and values at Canadian banks and telling boards and executives how to manage the integrity and security of their financial institutions.
“Our guideline only asks boards of directors to define their institutions’ own culture and underlying values and then take deliberate action to shape, evaluate, and maintain them,” Routledge said in remarks prepared for a C.D. Howe Institute speech in Toronto on Wednesday.
“We see this same approach in our guidance around character and people. We ask boards to define what those terms mean to their organizations and then take affirmative action to ensure those principles are upheld by management.”
Routledge referred to the interpretation that OSFI has articulated expectations for specific cultural values at financial institutions it regulates as an “incorrect meme” that misinterprets the steps taken by the regulator to deal with non-financial risks that could lead to financial and stability concerns. These include foreign interference, third-party and cyber risk, and the security of physical and information assets. These non-financial risks also exist in the integrity of leaders and adherence to the laws where the banks operate.
“Financial history is littered by companies that failed on these dimensions even though their financial indicators did not signal the severity of their problems, near to or until the last day of their existence,” Routledge said. “Experience teaches us that inadequate assessment of non-financial risks is usually the root cause of financial instability.”