The Office of the Superintendent of Financial Institutions is contemplating several regulatory changes as a result of the financial crisis.

Speaking to the Osgoode Hall Financial Regulatory Reform Conference earlier this week, Mark White, assistant superintendent, regulation sector at OSFI, highlighted three initiatives under way at the regulator due to lessons learned from the financial market turmoil.

First, he said that OSFI will be proposing a method for evaluating parental stand-alone capital adequacy, “to ensure greater consistency of stand-alone capital adequacy, and to better evaluate the protection for Canadian depositors and policyholders.” Currently the Basel framework requires capital adequacy to be determined on a consolidated, sub-consolidated and legal entity basis, he noted.

Additionally, he said that it is considering an update to its regulatory guidance for insurers that operate as part of holding company structures, after the near failure of AIG highlighted the importance of a holding company’s strength to its regulated subsidiaries.

Finally, he noted that there is a trend towards greater use of sophisticated internal models to create more risk sensitive capital requirements. “Currently, segregated fund guarantees are the only area where Canadian insurers use such models to determine capital requirements,” he noted, adding, “The recent financial turmoil has shown flaws with internal capital models, and segregated fund models are no exception. Particularly as both traditional life insurance risks and non-diversifiable market risks are concerns when dealing with segregated fund guarantees.”

As a result, he said that OSFI is conducting a fundamental review of internally-modeled capital requirements for seg fund guarantees. “We hope to present the results to the MCCSR Advisory Committee early in 2010, and to use this as a cornerstone for our ongoing work,” he concluded.

IE