OSFI’s Annual Risk Outlook 2025-2026
Key Considerations for the Canadian Lending Sector
On March 13, 2025, the Office of the Superintendent of Financial Institutions (OSFI) released its Annual Risk Outlook (ARO) for the 2025-2026 fiscal year, identifying key risks facing Canada’s financial system and outlining its regulatory response. The report highlights an increasingly complex risk environment driven by geopolitical uncertainty, digitalization, and structural shifts in the economy. For members of the Canadian Lenders Association (CLA), OSFI’s assessment provides important insights into emerging regulatory priorities that will shape lending practices, compliance obligations, and risk management frameworks in the year ahead.
One of OSFI’s most pressing concerns is the integrity and security of Canada’s financial system, a risk that has been elevated in priority due to growing threats related to financial crime, cyberattacks, and third-party vulnerabilities. OSFI warns that criminals and state-linked actors are becoming more sophisticated, using advancements in AI and digital technology to perpetrate fraud, money laundering, and cyber intrusions. As a result, financial institutions will be expected to strengthen their defenses against cyber threats and ensure they have robust compliance and governance frameworks in place to mitigate operational risks. Institutions that rely heavily on third-party service providers will also need to conduct enhanced due diligence, as OSFI has identified gaps in regulatory oversight for outsourced financial services. The agency has committed to working closely with intelligence and law enforcement agencies to assess risks posed by foreign actors and will continue enhancing cyber incident reporting requirements.
Credit risk remains a core area of supervisory focus, particularly as corporate and commercial borrowers navigate a challenging economic environment. OSFI notes that businesses continue to face elevated debt servicing costs, tighter lending conditions, and weaker consumer demand. Commercial real estate is another area of heightened risk, with office space demand remaining weak due to high vacancy rates and changing workplace dynamics. Lenders with exposure to commercial mortgages, particularly in high-rise developments and office properties, should expect increased regulatory scrutiny on risk concentration and portfolio management practices. OSFI has indicated that it will be closely monitoring credit risk migration and delinquency trends, with a focus on ensuring that institutions maintain adequate loan loss provisions.
Liquidity and funding risks are also being flagged as potential concerns, particularly in light of ongoing geopolitical uncertainty. While OSFI acknowledges that deposit flows and wholesale funding markets have remained stable, it warns that market conditions could shift quickly if investor sentiment deteriorates due to macroeconomic volatility or financial system stress. The growing digitalization of financial services has also increased the speed at which liquidity risks can materialize, with real-time payment systems and near-instantaneous capital flows potentially reducing the ability of financial institutions to respond effectively to stress events. OSFI has indicated that it will be conducting assessments on institutions’ ability to manage cross-border liquidity risks and foreign currency exposures, as well as consulting on revisions to its liquidity adequacy framework. Lenders should ensure they have well-developed contingency funding plans in place to mitigate the risk of unexpected market disruptions.
Real estate secured lending remains a key area of regulatory oversight, particularly as a large proportion of mortgage borrowers are set to renew at higher interest rates over the next two years. OSFI notes that while delinquency rates remain below pre-pandemic levels, they are expected to rise as more households face mortgage payment increases. The softening condo market and increased walkaway risk for high-rise developments are additional concerns, particularly in urban centers such as Toronto and Vancouver. OSFI has reiterated its commitment to ensuring responsible mortgage lending practices and has maintained its limits on uninsured mortgage originations exceeding a 4.5x loan-to-income ratio. Lenders involved in mortgage underwriting should be prepared for continued supervisory engagement and possible refinements to OSFI’s stress testing and underwriting guidelines.
In addition to these risk areas, OSFI has signaled its intent to introduce new regulatory initiatives in the coming year, including updates to corporate governance guidelines, enhanced expectations for AI governance, and targeted revisions to liquidity risk management frameworks. Institutions should be prepared for evolving compliance requirements, particularly in areas related to financial crime, operational resilience, and the integration of new technologies. The agency has also committed to maintaining its quarterly regulatory release schedule, which will provide industry participants with greater predictability regarding upcoming policy changes.
For members of the Canadian Lenders Association, the 2025-2026 ARO underscores the need for proactive risk management and regulatory preparedness. Institutions should review their cyber resilience strategies, reassess their credit risk exposure, and ensure that their liquidity contingency plans are robust enough to withstand potential market stress. Given OSFI’s heightened focus on financial integrity, lenders should also be prepared for increased scrutiny of AML compliance, fraud detection capabilities, and third-party risk oversight. The evolving regulatory landscape presents both challenges and opportunities for lenders operating in Canada, and companies that take a proactive approach to addressing these issues will be best positioned to navigate the year ahead.
For further insights on how these developments may impact your organization, or to discuss regulatory compliance strategies, please feel free to reach out to gary.schwartz@canadianlenders.org. Read Key Trends and Shifts in OSFI’s Risk Outlook (2022-2026)
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