The risk mitigating and intervention actions of the Office of the Superintendent of Financial Institutions have contributed to continued public confidence in Canada’s financial system and generally strong performance by financial institutions, says OSFI in the financial regulator’s 2003/2004 annual report.

“Canadians are fortunate to have one of the strongest, most dynamic and successful financial systems in the world,” states Superintendent Nick Le Pan in the report. “While much of the credit must be given to the institutions we regulate, OSFI believes it has also played a key role in contributing to the safety and soundness of the industry and the confidence Canadians express in their institutions.”

Although many Canadian financial institutions have experienced a return to better credit quality and profitability, OSFI says it continues to identify selected situations where risks assumed by institutions are not matched by the required capability to measure, monitor and manage those risks.

“OSFI will continue to execute its mandate by pursuing effective mechanisms for evaluating and managing risk, programs to promote sound business and financial practices, and the capacity and willingness to intervene early to avoid or minimize potential problems,” added Le Pan in his message.

The performance highlights section of the annual report indicates the property and casualty insurance industry’s operating results improved significantly in the past year with a return on equity of 11.4%. The industry’s ratio of expenses to premiums fell below 100% for the first time in two decades. As well, there were fewer pension plans on OSFI’s watch list, with the number dropping throughout the year from a high of 96 to 83.

Although pension plan underfunding is permitted due to the long-term nature of pension investments, OSFI says it continues to actively monitor and intervene where warranted to protect pension plan members’ benefits. Based on OSFI’s calculation of estimated solvency ratios, approximately 50% of all defined benefit plans supervised by OSFI were underfunded and over half of these were underfunded by more than 10%.

The annual report also notes that asset quality and capital ratios continue to improve at Canadian financial institutions. The average ratio of capital to risk-adjusted assets for banks increased to over 13% at the end of 2003. OSFI says this ratio is considerably higher than the Bank for International Settlements (BIS) 8% minimum threshold or OSFI’s 10% target for banks. For life insurers, OSFI says the ratio of actual capital to the minimum requirement was also very strong.

The report notes that OSFI also took action to determine the progress financial institutions have made in developing anti-terrorist financing and anti-money laundering programs. OSFI has now assessed these programs in institutions representing 90% of total industry assets, up from 63% previously. OSFI says it has identified and communicated a number of areas for improvement.