The Office of the Superintendent of Financial Institutions is planning to beef up its ability to detect prudential risks.

In its report detailing its priorities for the year ahead, OSFI says it is aiming to enhance its ability to identify risks and their impact, and using that increased understanding to adjust supervisory and regulatory expectations. “The priority involves increasing our surveillance of markets to better determine the impacts of events on financial institutions,” it says.

OSFI is also planning more comparative reviews. “We will benchmark how banks manage liquidity risk, the rigour of their stress testing, the robustness of their valuation processes, as well as their securitization activities,” it explains. Also, in the life insurance sector, commercial real estate activities will be reviewed, and in the banking sector, US commercial real estate activities will be reviewed.

“Pressures on the balance sheets of the large money-centre banks and broker-dealers from off-balance sheet conduits, leveraged buyout loans, and stalled structured finance transactions raise risks that could generate a lack of confidence in the Canadian economy,” it cautions.

In the longer term, OSFI pledges to continue working to strengthen prudential regulation. To this end, it will continue participating in international groups such as the Financial Stability Forum, the Basel Committee on Banking Supervision, and the International Association of Insurance Supervisors, to identify and discuss events arising from global financial market turmoil.

Additionally, OSFI says it will continue its support for: domestic implementation of the Basel II Capital Accord; preparations for the move from Canadian GAAP to International Financial Reporting Standards; development of a more risk-based capital framework for life insurance companies over the next five years; and the enhancement of OSFI’s ability to perform in an increasingly complex pensions market.

Its International Advisory Group will also continue to help emerging market economies enhance their regulatory and supervisory systems.