On August 1, 2025, the International Monetary Fund (IMF) published its latest Financial System Stability Assessment (FSSA) report for Canada1. While the report highlighted Canada's strong and well-regulated financial system, it also pointed to emerging challenges that could create headwinds for the industry in the near future.
While it is important for Canada to take the IMF's recommendations seriously in order to continue to be recognized as a leader in financial regulation, there are certain recommendations that we do not believe make sense in the Canadian context and we would encourage the Department of Finance and the Office of the Superintendent of Financial Institutions (OSFI) to push back in those circumstances.
What you need to know
- The FSSA's suggestion that OSFI has a dual safety and soundness-competition mandate is incorrect, and its recommendation to suppress references to "the need to allow financial institutions to compete effectively" in the Office of the Superintendent of Financial Institutions Act could stifle competition within the financial services sector.
- The report's recommendation of strengthening OSFI's operational independence and budgetary autonomy free from political interference is not feasible within the Canadian system of parliamentary democracy, nor does it reflect practical concerns.
- A supplemental document to the FSSA recommends revising the related party framework within the Bank Act to better align with the Basel Core Principles; however, it is not necessary to revamp the regime simply to adhere more closely to international standards.
Background
The FSSA summarizes the key findings of the IMF's Financial Sector Assessment Program (FSAP), which is conducted every five years for countries with systemically important financial sectors2. The FSSA report was based on the work of IMF FSAP missions to Canada during October-November 2024 and February 2025.
The report notes that Canada's financial system is strong and well-regulated, and that stress tests indicate that Canadian banks and non-bank financial institutions are generally resilient to severe solvency and liquidity shocks; however, it warned that intensifying geoeconomic fragmentation and mounting trade risk could weigh on growth, unemployment and real estate valuations. It also commented that financial sector oversight and crisis management frameworks are robust, but could be strengthened to proactively address emerging challenges—for example, by enhancing cooperation and information-sharing between federal and provincial authorities (particularly concerning non-bank financial institutions).
The FSSA report also included several recommendations in the areas of systemic risk monitoring, analysis and coordination (including climate); financial oversight; and crisis preparedness and management, including expected timing for implementation ranging between immediate (within one year), short term (within one to three years) and medium term (within three to five years).
The report's recommendations
OSFI's mandate
The FSSA report focused on OSFI's mandate as set forth in the Office of the Superintendent of Financial Institutions Act (OSFI Act). In particular, the IMF commented that the overarching priority to promote the safety and soundness of supervised entities and contribute to financial stability should be more explicitly enshrined in the OSFI Act as a primary objective for OSFI, and that the OSFI Act should clarify or suppress references to "the need to allow financial institutions to compete effectively and take reasonable risks". This comment was made in response to section 4(3)(a) of the OSFI Act, which stipulates that in pursuing its objects, "the Office shall strive in respect of financial institutions, to protect the rights and interests of depositors, policyholders and creditors of financial institutions, having due regard to the need to allow financial institutions to compete effectively and take reasonable risks" [emphasis added]3.
The IMF is concerned that the primary objective of supervision is not entirely clear due to a perception of a "dual mandate" (i.e., competition is given an equal footing as protection of depositors, as opposed to seeing the protection of depositors as its indisputably primary responsibility).
In response, "Canadian authorities" (which is not defined in the FSSA report, but we assume includes reference to OSFI) noted that OSFI pursues a singular safety and soundness objective while having "due regard" for the need to enable financial institutions to compete and take reasonable risks.
We would note that the suggestion that OSFI essentially has a dual mandate with competition is wrong. Section 3.1 of the OSFI Act very clearly defines the purpose of the Act, which is to ensure that financial institutions are "regulated by an office of the Government of Canada so as to contribute to public confidence in the Canadian financial system". Section 4(3) is simply clarifying considerations that should be taken into account in pursuing OSFI's objects.
These sections were added to the OSFI Act in 1996 following the 1995 white paper, Enhancing the Safety and Soundness of the Canadian Financial System, in which the government proposed to amend the Act to include a legislated mandate:
The mandate would also recognize that a balance must exist between the role of the supervisor to minimize risks and the role of financial institutions, which must take reasonable risks to meet the demands of the market place and to prosper4.
The white paper and proposed OSFI mandate were heavily debated and considered, including at a meeting of the Standing Committee on Finance on June 15, 1995. At that meeting, Nick Le Pan (then Special Advisor to the Deputy Minister of Finance) made the following comments:
The government's white paper makes it clear that the government does not expect a zero-failure system. In order to get to a zero-failure system, to guarantee that there would never be any failures of financial institutions, the level of regulation and supervision would have to be so high that, in fact, we would stultify the kind of initiative that's desirable here, because we do want a competitive flexible system as well. The issue is always a balance between those two, but it's pretty clear that we're not proposing at this point a zero-failure system.
In addition, the Report of the Task Force on the Future of the Canadian Financial Services Sector (the MacKay Task Force) in 1998 suggested that OSFI should be given a dual mandate to focus equally on competition5. This suggestion was rejected and OSFI's mandate was not changed.
Given the intense scrutiny and debate that OSFI's mandate was subjected to prior to coming into force, we do not believe it would be reasonable to overlook that process and accept the IMF's suggestion. In particular, as alluded to by Mr. Le Pan, if the provision acknowledging that financial institutions operate in a competitive environment and need to take reasonable risks was removed, OSFI—which is arguably one of the most conservative prudential regulators in the world—would become even more conservative and could very well stifle competition within the financial services sector both domestically and internationally.
We would also note that there has not been any failure of a Canadian incorporated financial institution in the almost 30 years since the OSFI mandate was created, which is fairly persuasive evidence of OSFI's intense focus on safety and soundness.
OSFI's independence and budgetary autonomy
The IMF recommended strengthening the operational independence and budgetary autonomy of OSFI to ensure that its resources keep pace with its objectives and mandates, free from potential interference. The IMF noted that the Minister of Finance has a prominent statutory role in prudential matters and the Governor in Council has powers to bring forward regulations with respect to OSFI's mandate. The IMF also noted that, while OSFI is funded by its regulated institutions, the Minister of Finance has to sign off on its budget, which could undermine OSFI's autonomy and generate resource constraints.
While we understand the theoretical concerns raised by the IMF, in our view there is no practical concern about OSFI's independence or budgetary autonomy. In fact, in OSFI's 2023-2024 annual report6, it highlighted a 28.4% increase in headcount from the previous year and the overall full-time employee count has almost doubled in the past five years7. Accordingly, we don't believe there is any reasonable basis to suggest that the Minister of Finance is imposing austerity on OSFI today. In addition, as noted by Canadian authorities in their response to the finding, this recommendation is not feasible within the Canadian system of parliamentary democracy and ministerial accountability.
Aligning related party frameworks with international standards
In support of the FSSA report, the IMF also published a supplemental document called Detailed Assessment of Observance – Basel Core Principles for Effective Banking Supervision8. One of the findings in this sub-report noted that the implementation of a related party prudential framework aligned with Basel Core Principles (BCP) is missing in Canada.
The IMF noted that the Bank Act's related party regime is complex to understand and subject to exceptions that may not be prudent, and that the definition of "related party" in the Bank Act is much narrower than in the international standard9. The IMF also commented that (i) banks do not report related party transactions to OSFI and, consequently, OSFI does not monitor these transactions; and (ii) apart from being able to trigger supervisory action from the identification of an issue self-reported by the banks, OSFI does not conduct reviews with a view to control risks of transactions with related parties. Accordingly, the IMF recommended that the Bank Act incorporate the definition of related party according to the international standard and for the related party framework to establish an internal expectation for supervisors to monitor related party transactions in ongoing monitoring.
Basel Core Principle 20 – Transactions with Related Parties provides that:
In order to prevent abuses arising in transactions with related parties and to address the risk of conflicts of interest, the supervisor requires banks to: enter into any transactions with related parties on an arm's length basis; monitor these transactions; take appropriate steps to control or mitigate the risks; and write off exposures to related parties in accordance with standard policies and processes10.
In the FSSA report, "Canadian authorities" responded that Canada has an advanced related party regime designed according to principles that have worked well in a Canadian context, where compliance with legislation is reliance-based and the regulator rigorously supervises financial institutions and addresses issues of non-compliance, but that it will reflect on the IMF's recommendations.
We agree with the Canadian authorities and do not believe that the Bank Act related party regime requires any modifications. We are not aware of any prudential concerns emanating from related party transactions in the last 30 years following amendments to the Bank Act in 1992 (which were made to address a weaker related party regime at that time) and do not believe it is necessary to revamp the regime simply to align more closely with the BCP. In fact, one could argue that the existing related party regime in Canada may be more restrictive than the BCP since it prohibits any related party transaction unless expressly permitted; by contrast, the BCP appears to permit any transactions with a related party so long as it is on an arm's length basis.
With respect to the definition of "related party", the Bank Act also includes a provision permitting the Superintendent to designate any person whose direct or indirect interest in, or relationship with, the bank might reasonably be expected to affect the exercise of the best judgment of the bank in respect of a transaction. Accordingly, in our view, it is not necessary to expressly adopt the BCP definition of related party.
We would also argue that it is inaccurate to suggest that OSFI does not monitor related party transactions. There are certain permitted related party transactions that can only be entered into with prior approval of the Superintendent. In addition, section 195(6) of the Bank Act11 requires the directors of a bank to report to the Superintendent within 90 days after the end of the fiscal year on what the conduct review committee did during the year in carrying out its statutory responsibilities. Furthermore, OSFI is provided with board and committee materials as part of its ongoing supervision of financial institutions and has broad powers to request information from an institution12.
Footnotes
1. International Monetary Fund, Canada: Financial System Stability Assessment-Press Release and Staff Report, August 2025.
2. The FSAP, established by the IMF in 1999, is a comprehensive and in-depth assessment of a country's financial sector.
3. Office of the Superintendent of Financial Institutions Act, section 4(3)(a), 1985.
4. Enhancing the Safety and Soundness of the Canadian Financial System (1995), page 6.
5. "Second, we believe that [OSFI's] mandate does not adequately reflect the need to balance safety and soundness considerations with the desirability of facilitating effective competition in domestic financial services markets. We do not believe that OSFI's role should be to actively promote or foster competition. It is, first and foremost, a prudential regulator. But within the scope of its activities, from time to time it will be called on to approve new entrants or to endorse new and innovative products or approaches brought forward by existing institutions. In these functions, we believe it is imperative that the impact on safety and soundness be weighed against the particular contribution to competition that such new entrants or innovations might bring to consumers, and that an appropriate balance be struck." MacKay Task Force, page 178.
6. OSFI, Annual Report: April 1, 2023 - March 31, 2024, 2024.
7. As of March 31, 2019, OSFI's full-time equivalent employee count was 741. As of March 31, 2024, OSFI's full-time equivalent employee count was 1,315.
8. IMF, Canada: Financial Sector Assessment Program - Detailed Assessment of Observance-Basel Core Principles for Effective Banking Supervision, August 2025.
9. The related party regimes under the Insurance Companies Act (ICA) and Trust and Loan Companies Act (TLCA) are identical to the Bank Act regime. References in this part to Bank Act should be read to also apply to the ICA/TLCA.
10. Basel Committee on Banking Supervision, Core Principles for effective banking supervision, April 2024.
11. Section 204(6), ICA; section 199(6), TLCA.
12. There is also a statutory requirement for the board of a federal financial institution to establish a conduct review committee of at least three members consisting of a majority of independent directors, and for that committee to review the effectiveness of procedures established by management for complying with the self-dealing regime. See section 195 BA; section 204, ICA; and section 199, TLCA.
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