Federal banking regulators are shifting their approach to monetary penalties, expanding firms’ obligations to address emerging AI risks and revising capital rules, among other policy reforms.
The Office of the Superintendent of Financial Institutions (OSFI) unveiled a series of changes to its rules and guidance aimed at enhancing its focus on certain risks, clarifying expectations and improving oversight.
In particular, the regulator announced revisions to its use of administrative monetary penalties, aligning the tool more closely with OSFI’s “risk appetite… [which] favours early intervention to address risks that could jeopardize the public’s confidence in the soundness of the Canadian financial system.”
While the criteria for setting penalties haven’t changed, OSFI said it will have less tolerance for violations, “such that penalties will be issued when we determine lower levels of negligence and harm.”
It also revised how penalties are calibrated for small and mid-sized financial institutions and expanded the indicators used to assess penalty criteria. These changes take effect immediately.
AI risks
At the same time, OSFI announced planned revisions to its guidance on model risk management to address the emergence of AI risks as financial institutions make greater use of AI tools and increase their reliance on big data.
“Models now use more diverse data sources and complex techniques that heighten different aspects of model risk,” OSFI said in a notice outlining the changes.
In turn, these increased model risks could expose financial institutions to “financial loss from flawed decision making, operational losses, legal implications or reputation damage,” it noted — adding that models using AI tools can also “exacerbate these risks” by enabling autonomous decision-making.
Amid these evolving risks, the revised guidance calls for financial institutions to adopt effective risk management practices. The changes will take effect in May 2027.
Additionally, the regulator is revising capital adequacy rules to better capture certain risks — including updates to improve the credit risk capital treatment of sovereign exposures, clarifying the treatment of U.S. government-sponsored entities, identifying income-producing residential real estate exposures and refining the treatment of combined loan products. Those revisions take effect in January 2026.
Finally, OSFI, along with the Autorité des marchés financiers, published a report on their climate stress test, the standardized climate scenario exercise, which aims to enhance the sector’s understanding of climate-related financial risks.
“OSFI has proactively established an annual discipline of refining our regulatory guidelines and advisories, looking for opportunities to remove unnecessary burden,” said Peter Routledge, superintendent of financial institutions, in a release.
“Our actions have been clear: reduce regulatory burden where possible, sharpen our focus on the most important risks and enable institutions to remain resilient and competitive in an uncertain world,” he added. “A strong, stable financial system isn’t just a safeguard — it’s a catalyst for national prosperity.”