Oversight regimes for credit unions and banks converging, DBRS finds

The provincially regulated credit union system is increasingly gravitating toward tougher federal standards, but gaps remain, DBRS says.

In a new report, the rating agency examined the state of credit union regulation, which has historically been a provincial domain; however, that’s changing.

A couple of credit unions now operate nationally under supervision of federal regulator the Office of the Superintendent of Financial Institutions (OSFI), and a couple of other firms are pursuing national registration, the report said.

Against this backdrop, the report noted that some provincial regulators are aligning their regulatory requirements with OSFI, which generally imposes tougher requirements that meet global standards devised for the banking sector. In other areas, credit unions continue to have less onerous provincial regulations.

For instance, some of the provincial regulators have less stringent residential mortgage underwriting standards than OSFI has imposed at the federal level.

“Most credit unions have underwriting practices that emulate the spirit of the original [OSFI standards]; however, some provincial regulators, specifically those of British Columbia and Ontario, have not yet adopted the revisions made in 2018,” it noted, referring to the tougher stress testing requirements OSFI introduced that year.

Yet, regulators in other provinces — namely Alberta and Saskatchewan — have aligned their standards more closely with OSFI’s latest requirements, DBRS said, adding that it views that development as a positive.

The regulators in Alberta and Saskatchewan have also adopted added capital buffers for systemically important institutions, similar to the buffers OSFI adds to systemically important banks to guard against damage to the wider financial system if these firms failed, the report noted.

DBRS said it views the credit union systems’ shift toward Basel III–style capital requirements as a positive, given that these rules were devised to address vulnerabilities that were exposed by the financial crisis.

Most credit unions also meet liquidity standards that align with OSFI’s standards, it said.

Again, DBRS said it “views the implementation of these metrics positively as they provide enhanced visibility into the liquidity profiles of individual credit unions.”

Still, there remain differences between the federal and provincial regimes, the report said, including fewer restrictions on the activities of provincially regulated firms.

“For example, credit unions are still permitted to sell insurance products to their members, which adds to their product diversity and can support their franchise strength and enhance their non-interest income,” the report said.

The credit unions that have pursued national registration face the same kinds of restrictions on their insurance activities as the banks, the report noted.

Ultimately, it concluded, “While federal and provincial regulators are not perfectly aligned on various regulatory requirements, there may be increasing pressure for provincial credit union regulators to align with OSFI’s more rigorous standards and guidelines as larger provincial credit unions seek more wholesale funding.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.