According to OSFI, the real estate recession and cyberattacks are the main risks to the Canadian financial system

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The threat of cyberattacks and a slowing housing market are among the biggest risks to the financial system, according to the Office of the Superintendent of Financial Institutions’ first-ever annual risk outlook.

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The report, which aims to promote transparency by providing an annual overview of the most pressing systemic threats and how regulators are responding to them, notes that cybersecurity threats have become more sophisticated and serious. This concern increased following Russia’s invasion of Ukraine, which led OSFI to stress to federally regulated financial institutions the importance of having safeguards in place to deal with to such attacks.

There has been an increase in disruptive ransomware attacks, such as the Colonial Pipeline hack in the United States in May last year, which crippled the IT equipment needed to run pipeline infrastructure. OSFI said such attacks could result in data loss, financial loss and damage to public trust that would erode the institution’s reputation.

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To combat the problem, OSFI is piloting its own cyber-resilience tests to uncover weaknesses in financial institutions’ cybersecurity defenses, which the office says have already yielded valuable insights. The firm has also drafted a guideline on expectations for sound cyber risk management.

OSFI also sounded the alarm on the overheating of the housing market and the over-indebtedness of borrowers, which increased the sensitivity of the financial system to a price correction.

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“While lending institutions are currently well capitalized and appear to be financially resilient, such a sequence of events could lead to borrower defaults, a disorderly market reaction, and broader economic uncertainty and volatility,” the report warns.

The report adds that recent supervisory reviews have identified underwriting issues, including faulty revenue verification.

OSFI is also considering extending the mortgage underwriting practices of the B-20 guidelines to other products such as reverse mortgages as they rapidly gain popularity. The review of the minimum qualification rate stress test and other measures in the B-20 guidelines is part of OSFI’s strategy to keep an eye on real estate risks.

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The organization also identified a number of other risks to watch closely, including: rapidly evolving digital innovations such as cryptocurrencies and open banking, which could pose a threat to financial institutions’ business models , if they failed to keep up; risks related to climate change; disruptions resulting from financial services agreements with third-party service providers; the possibility of a downturn in the commercial real estate market; and a fragile corporate debt picture.

OSFI said it plans to track ongoing risks to the financial system with annual reports as the risk landscape changes from year to year.

“With our first Annual Risk Outlook, we are providing Canadians with transparency on the financial system risks facing our country and our supervisory and regulatory responses to those risks,” said Peter Routledge, Superintendent of Institutions. financial. “In doing so, we are committed to strengthening the prudential oversight framework for Canada’s federally regulated financial institutions and pension plans, which, in turn, will strengthen the resilience of the financial system.

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