The Office of the Superintendent of Financial Institutions has issued a report setting out its plans and priorities for the next three years.

Looking at the risks it faces, OSFI notes that the North American economy is slowing but still growing, and that the general consensus is that expansion will continue through 2007, but at a moderate pace. It adds that Canadian financial institutions are operating in an increasingly complex, international environment.

“OSFI’s supervisory efforts will be optimized through development and maintenance of working relationships with foreign regulators,” it says, adding, “Increasingly complex financial products mean that more effort is required, on the part of institutions and OSFI, to assess risk.”

It also indicates that there is a need for financial institutions to adopt international accounting standards over the next five years. This may add to the volatility of earnings, it says, adding that current risk management practices may not be adequate.

Additionally, Basel II implementation in November will change the way financial institutions run their businesses and the way OSFI supervises them.

Finally, it points out that long-term interest rates remain low, contributing to challenges for the pension industry. Canada’s pension environment is increasingly litigious; and court decisions increasingly affect OSFI’s work, the regulator says.

OSFI has identified several priorities and projects to respond to the external risks the organization faces in the current planning period. It is planning responses to a possible crisis or health pandemic, as well as reviewing financial institutions’ preparedness for a pandemic.

It plans to carry out table-top exercises and will emphasize financial institutions’ stress-testing capabilities.

As for Basel II implementation, for the first year of the 2007-2010 planning period, OSFI will focus on being able to review and process applications that are submitted for approval. Also, starting in the 2008-2009 year, OSFI will focus on the move to international accounting standards.

OSFI adds that work has begun on changes to the Minimum Continuing Capital Surplus Requirement, a five-year project to develop and agree on a capital framework for life insurance companies. “One component of the project will be to develop implementation criteria for risk-sensitive methodologies and internal models. Interest rate risk will be addressed first, followed by credit risk, and then other risks,” it says.

The regulator has also identified several priorities to respond to the external, people and systems risks the organization faces.