Thursday, July 05, 2007

Bear Down on Risk, OSFI Head Tells Banks

The Globe and Mail, Tara Perkins, 5 July 2007

Bank of Montreal's recent $680-million loss from commodity trading is an important reminder to continually put risk under the spotlight, says the incoming head of Canada's financial services regulator.

Julie Dickson, who was appointed to the Office of the Superintendent of Financial Institutions yesterday by Finance Minister Jim Flaherty, said in an interview that BMO's control functions did detect a problem, and the bank took steps to contain its risk.

But "it's an important reminder to be on top of risk at all times," she added.

As the head of the OSFI, Ms. Dickson will work toward ensuring that the banks and other institutions that house Canadians' savings remain sound. OSFI was created 20 years ago to regulate and supervise federally registered deposit-taking institutions and private pension plans as well as insurers.

In a recent document outlining its plans and priorities, OSFI noted that "increasingly complex financial products mean that more effort is required, on the part of institutions and OSFI, to assess risk."

Ms. Dickson said one current focus at OSFI is stress testing, or pushing institutions to look at various possibilities and worst-case scenarios to determine how they would affect their businesses.

The increased use of stress testing is one of the changes coming about as Canadian banks prepare to implement Basel II this November. The new international recommendations on banking regulations will change the way financial institutions run their businesses and the way OSFI supervises, the regulator said.

Another change will be the need for financial institutions to adopt international accounting standards in the near future, Ms. Dickson said. The standards may add to the volatility of earnings, OSFI said recently, and current risk management practices might not be adequate.

Updating the capital requirements for insurance companies is another priority, she added, and the regulator also plans to increase the relationships it has with foreign regulators.

Ms. Dickson has been working at OSFI since 1999, and stepped in as acting superintendent last October after former superintendent Nick Le Pan retired.

She had previously worked for 15 years at the Department of Finance, and spent three years at a consulting firm.

For her, the new role will really be "a continuation of business as usual," she said, adding that that means maintaining the high level of confidence that Canadians have in the safety of money they entrust to financial institutions.

Ms. Dickson also noted that the regulator has a fair number of applications for new financial institutions. "There is interest out there in the marketplace in setting up new banks."

Her appointment is for a seven-year term, and she declined to speculate on whether bank mergers might take place on her watch.

There has been a lot of consolidation in the sector in the past, she said, and OSFI's role in those instances includes determining whether the deals are affordable and whether the institutions have viable plans, as well as examining everything from who the CEO should be to internal controls, she said.