OSFI sees Canada’s strengthening dollar as an emerging risk

The Office of the Superintendent of Financial Institutions (OSFI) is warning that Canada’s strengthening dollar is an emerging risk for which financial institutions should be prepared.
“In recent months, a risk related to the global competitiveness of the Canadian economy has materialized,” OSFI notes in its 2010-11 Estimates: Part III — Report on Plans and Priorities.
“The Canadian dollar has strengthened significantly, and become more volatile, reflecting both uncertainty about the long-term value of the U.S. dollar and an increase in commodity prices.
“The current strength in the Canadian dollar could offset any favourable developments at this early stage of recovery given the strong trade links between Canada and U.S. economies.”
OSFI outlines a number of sources of risk to the strength and stability of the financial system.
They include another global economic shock or loss of investor confidence, the ability of households to finance debt obligations as interest rates rise, ongoing subdued economic growth and exchange rate fluctuations.
The result, OSFI says, is a need for a vigilant approach to capital stress-testing.
“On a micro-level, prevailing conditions continue to put pressure on [OSFI’s] Capital and Accounting Policy Divisions to provide interpretations or to reassess existing guidance to ensure its effectiveness under stressful and evolving conditions.”
To promote its first strategic outcome of a “safe and sound Canadian financial system,” OSFI says there is a need to improve the risk sensitivity of the Minimum Continuing Capital and Surplus Requirement (MCCSR) and the Minimum Capital Test (MCT), “as well as to incorporate changes due to IFRS, while maintaining the integrity of the existing capital tests.”
In addition, companies are reminded about potential changes to capital adequacy due to Basel II.
“Due to the breadth of change and the novelty of certain measures [listed above], there is a risk that the review, consultation and implementation of these changes will require more resources than expected by both financial institutions and OSFI,” the strategic paper cautions.