A general guide to OSFI’s intervention process
OSFI staff supervise approximately 140 banks, trust companies and loan companies, both those headquartered in Canada as well as foreign banks operating here. Collectively these are known as deposit-taking institutions, or DTIs. If concerns arise about the financial position or operations of a DTI, OSFI can assign it a stage rating on a scale from Stage 1 (Early Warning) to Stage 4 (Non-Viability/Insolvency Imminent).
Watch a video on OSFI's 4-stage intervention process.
OSFI’s Supervisory Intervention Approach
Transcript - OSFI’s Supervisory Intervention Approach
[Music]
[Animated video explaining OSFI’s supervisory intervention approach]
Narrator: The Office of the Superintendent of Financial Institutions, or OSFI, is an independent federal government agency that regulates and supervises Canadian banks, insurance companies and private pension plans to determine whether they are in good financial condition.
Canada's banking and financial systems are among the strongest and safest in the world.
One of the reasons for this is OSFI's early supervisory intervention approach.
Our supervisors regularly examine financial institutions and pension plans, focusing on their financial condition, risk management and controls, and governance.
When we find weaknesses, we ensure the institution or plan administrator addresses these issues in a timely manner.
Issues can become more noticeable during times of economic stress.
Let's take a closer look at the intervention process for federal financial institutions.
It's important to know that the intervention process is a flexible one because each case is unique.
Text on screen: Intervention process
Narrator: OSFI has published intervention guides that explain the four stages of intervention: early warning, moderate alert, high alert and situation critical.
Text on screen: Intervention guides: Early warning; Moderate alert: Risk to financial viability or solvency; High alert: Future financial viability in serious doubt; Situation critical: Non-viability / Insolvency imminent
Narrator: The guides explain the tools our teams can use at each stage, and when specific actions typically happen.
Throughout the process, we keep all information confidential so we do not undermine public confidence in an institution.
We always want to improve the safety and soundness of an institution, because this protects the best interests of depositors, policyholders and other creditors.
Text on screen: Intervention process: Stage 1 – Early warning
Narrator: Let's examine the four stages of the intervention process more closely, beginning with Stage 1, the early warning stage.
We put an institution in Stage 1 when we find problems that are significant, but do not yet make us concerned about its safety and soundness.
It is still important to quickly address weaknesses to prevent further deterioration.
Examples of our Stage 1 activities include issuing a letter with a list of problems to address, requiring an institution to provide a plan on how to address the problems, and following up frequently to make sure it is responding effectively.
Text on screen: Intervention process: Stage 2 – Moderate alert
Narrator: Moving an institution to Stage 2, or Moderate Alert, means we have concerns about its safety and soundness.
While there are no immediate threats to its financial viability, it is vulnerable to negative business and economic conditions.
Examples of our Stage 2 activities include increasing capital and liquidity requirements, and imposing business restrictions, such as limiting how much an institution can grow and the types and amount of business it can conduct.
Text on screen: Intervention process: Stage 3 – Hight alert
Narrator: Moving an institution to Stage 3, or High Alert, means it has severe safety and soundness issues and is in danger of failing unless the problems are promptly addressed.
Examples of our Stage 3 activities include embedding OSFI staff in the institution's operations and tightening business restrictions.
Text on screen: Intervention process: Stage 4 – Situation critical
Narrator: At Stage 4, or Situation Critical, OSFI staff have determined the institution is experiencing very severe financial difficulties and is on the brink of non-viability.
At this point, our focus shifts from preventing failure to working closely with our partners to determine the appropriate strategies and solutions that best protect the interests of depositors, policyholders and creditors.
Text on screen: Bank of Canada, Department of Finance, Financial Consumer Agency of Canada, Canada Deposit Insurance Corporation, Assuris, PACICC (Property and Casualty Insurance Compensation Corporation)
Narrator: Fortunately, Canadian financial institutions rarely reach this point. But if one does, Canadians can count on OSFI's timely intervention action to protect the interests of depositors, policyholders and creditors.
Visual identifier for the Office of the Superintendent of Financial Institutions: OSFI logo
Narrator: For more information, visit the OSFI website at www.osfi-bsif.gc.ca, and stay connected with us on Twitter and LinkedIn.
Visual identifier for the Government of Canada: Canada wordmark
Depending on the circumstances, if after reaching Stage 4 a DTI’s viability is still in serious doubt or its insolvency is imminent, OSFI may take control. This could mean either temporary control of just the assets, or permanent control of the entire Canadian DTI or of the Canadian assets of a foreign bank branch. Taking permanent control usually lasts only as long as it takes to put a lasting solution in place, such as a winding-up order.
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OSFI would generally put a troubled DTI on its internal watchlist and assign a stage rating from Stage 1 to Stage 4 – each stage is more serious than the one before, and it is possible to go up and down stages.
If the trouble persists, OSFI steps in by taking control temporarily or permanently. This means OSFI staff or OSFI-appointed representatives are onsite and controlling the DTI’s assets and/or running it completely.
- Taking temporary control
- To allow time for a possible solution, OSFI can take temporary control of the assets of a Canadian DTI or foreign bank branch.
- Taking permanent control
- When there’s no possibility of a successful solution, OSFI can take permanent control of a Canadian DTI or of the assets of a foreign bank branch and ask the Attorney General of Canada to apply to the court for a winding-up order.
- Winding-up order
- A court-supervised process in which a liquidator is appointed to sell off the assets of the DTI or foreign bank branch with the intention of repaying creditors to the greatest extent possible.
NOTE: there are other actions that can be taken if a DTI is on the brink of non-viability. For example, if the DTI is one of Canada’s six domestic systemically important banks or D-SIBs, the Canada Deposit Insurance Corporation can use its bail-in power regime to recapitalize the struggling institution.
Taking temporary control
- OSFI can take temporary control of a DTI’s assets.
- To take temporary control, OSFI sends a notice to the DTI that it is taking temporary control of its assets and, if necessary, a notice of intent to seek permanent control.
- If applicable, the notice outlines the grounds for taking temporary control as well as a date for the DTI to make representations as to why OSFI should not take permanent control of the entire institution.
Taking permanent control
- If after reviewing the DTI’s representations OSFI finds that there is no reason to relinquish control of the assets, temporary control usually turns into permanent control.
- OSFI typically only takes permanent control for a very short period of time, since this step is accompanied by an application for a winding-up order.
- To take permanent control, OSFI must give advance notice to the DTI and the Minister of Finance.
- The Minister may prevent OSFI from taking control if they deem it not to be in the public interest.
- When a decision to take control has been made, OSFI appoints an agent – usually a third party – to act on its behalf and preserve the value of the DTI’s assets.
- The agent’s role involves making decisions about and taking action regarding the ongoing operation of the DTI, including:
- Taking possession of and exercising control over the DTI’s assets;
- Creating a full backup of the DTI’s financial information and any other important information and safeguarding all important physical and electronic data, systems and records;
- Determining which employees can have access to records and information, as well as which employees should be retained and allowed on the premises (which may involve changing the locks and issuing new keys or pass cards, if needed); and
- Deciding which payments can be made.
- OSFI also notifies its partners on the Financial Institutions Supervisory Committee of their intention, as well as certain other parties with an interest in the DTI, such as provincial regulators and large creditors, as applicable.
Taking permanent control almost always ends with a winding-up order, which starts a court-supervised liquidation – that is, selling assets to pay creditors – or restructuring of the DTI’s business.
Winding-up order
- A winding-up order is a court order authorizing the liquidation – or conversion to cash – of a Canadian-headquartered DTI’s assets. At this point the DTI is no longer a going concern.
- OSFI must ask the Attorney General of Canada to go to the relevant court in the province or territory where the DTI is based and apply for a winding-up order.
- This request is usually submitted on the same day as the decision to take permanent control is made.
- When the court makes a winding-up order, it also appoints a liquidator to oversee the orderly liquidation of the DTI or its assets. At this point, OSFI no longer controls the DTI or its assets, its supervision of the DTI ends, and it takes steps to remove the DTI from its list of regulated entities.
Resource
Learn how the Canadian Deposit Insurance Corporation protects depositors in the event of a member institution failure.