OSFI Overhauls Risk Governance Framework for Foreign Entities Operating in Canada
Ottawa, February 22, 2023
The Office of the Superintendent of Financial Institutions (OSFI) has introduced a revised risk governance framework aimed at enhancing the oversight and management of risks by foreign entities operating in Canada.
Effective Risk Governance: A Critical Component of Corporate Governance
According to OSFI, effective risk governance is essential for ensuring the stability and soundness of the financial system. The agency believes that foreign entities operating in Canada should be able to identify the important risks they face, assess their potential impact, and have policies and controls in place to effectively manage them.
Revised Framework Emphasizes Importance of Effective Risk Governance
The new framework, outlined in OSFI’s Corporate Governance Guideline, emphasizes the importance of effective risk governance as a critical component of corporate governance for financial institutions. The guideline is designed to ensure that foreign entities operating in Canada have robust risk management systems in place to identify, assess, and manage risks effectively.
Key Requirements of the Revised Framework
- Establish robust risk management systems
- Create a Board Risk Committee
- Appoint a Chief Risk Officer (CRO) with necessary stature and authority within the entity
- Ensure CRO’s compensation is not linked to performance of specific business lines
OSFI Updates Guidelines for Large Exposure Limits and Enterprise-Wide Model Risk Management
OSFI is also emphasizing the importance of effective risk governance in its Large Exposure Limits for Domestic Systemically Important Banks Guideline, which sets out a framework to limit the potential loss that would be suffered by a domestic systemically important bank as a result of a sudden failure of an individual counterparty or group of connected counterparties.
The agency is also updating its Enterprise-Wide Model Risk Management for Deposit-Taking Institutions Guideline, which ensures that all deposit-taking institutions have a baseline understanding of the minimum level of expectations with respect to their use of models that could have a material impact on their risk profile.
Conclusion
The revised risk governance framework introduced by OSFI is aimed at enhancing the oversight and management of risks by foreign entities operating in Canada. The agency believes that effective risk governance is essential for ensuring the stability and soundness of the financial system. Foreign entities operating in Canada are expected to establish robust risk management systems, including the creation of a Board Risk Committee and the appointment of a Chief Risk Officer (CRO).