Financial System Survey Highlights

The Bank conducts the Financial System Survey (FSS) twice a year to solicit the opinions of senior experts who specialize in risk management of the financial system. These experts provide their views on the risks to, and resilience of, the Canadian financial system, as well as on emerging trends in financial products and practices. The survey results are a useful benchmark to compare Bank views and analytical work with outside opinions. Bank staff also use these results to identify new topics for research and analysis.

The most recent survey, completed by 37 respondents, was conducted between March 11 and March 29, 2019. The survey included a special question on cyber risk. Presented here are the highlights of the spring 2019 FSS and some comparisons to the 2018 surveys.

For more information on the objectives and the design of the survey, see the June 2018 Financial System Review.

Highlights

  • The overall perception of risk has edged up over the past six months, continuing the upward trend from the previous two surveys. Respondents again cited the potential for a cyber incident as the most important risk to the Canadian financial system. The perceived risk related to a deterioration in the global economic outlook has increased. However, confidence in the resilience of Canada’s financial system remains high.
  • Respondents are most concerned about breaches of cyber security that would make confidential information public. They are also concerned that a cyber incident affecting a third-party service provider could severely disrupt their own critical activities.
  • Respondents continue to cite machine learning, artificial intelligence and big data as innovations expected to have the greatest impact on their firm’s activities. In addition, an emerging new development is the exchange of collateral to reduce counterparty credit risk for over-the-counter derivatives that are not centrally cleared.

Overall perceived risk and confidence

Among respondents, 38 per cent stated there was a slight increase in the probability that a high-impact event with the potential to severely impair the financial system would occur in the medium-term (one to three years) (Chart 1). The remaining 62 per cent stated the probability of such an event occurring remained the same. Similar results were observed in the 2018 surveys, where around 45 per cent of respondents noted a slight increase in risks.

The increase in risk perception in this survey was largely driven by the slowdown in global growth over the past six months and the weakening economic outlook. This contrasts with previous surveys that noted a range of drivers.

Chart 1: Two out of five respondents say that the probability of a high-impact event occurring has slightly increased, while three out of five say there’s been no change

Percentage of respondents

Still, 95 per cent of respondents are either completely, very or fairly confident that Canada’s financial system is resilient and would withstand an adverse high-impact event if one were to materialize (Chart 2). These results are roughly the same as those from the spring and fall surveys in 2018.

Chart 2: Confidence in the resiliency of the Canadian financial system remains high

Percentage of respondents

The most important risks

Respondents listed the three risks that, if realized, would most harm the functioning of the Canadian financial system (Chart 3). They also listed the three risks that would have the greatest impact on their organization’s activities (Chart 4). Risks to an organization’s activities are important when assessing system-wide risks because disruptions or difficulties at one organization can spread rapidly to others in Canada’s closely interconnected financial system.

The three most cited risks to the financial system in the spring 2019 survey are

  1. a cyber incident. More than half of respondents cited this risk that could harm the financial system. This proportion has been broadly unchanged since the first survey was conducted in the spring 2018.
  2. a deterioration in the global economic outlook. The proportion of respondents citing this risk has increased steadily since the spring 2018 survey.
  3. a drop in residential and commercial property prices. There is a notable increase in the proportion of respondents highlighting this risk relative to the last survey.

Disruption of international trade or trade disputes were again cited as an important risk in this survey, whereas geopolitical risk appears to have receded.

Chart 3: A deterioration in the global economic outlook is increasingly cited as an important risk to the Canadian financial system

Percentage of respondents who cited a given risk in their top three

Note: As part of the question, respondents are asked to list their top three risks. The responses are grouped into different types of risks.

The three most cited risks to an organization’s own activities were

  1. a cyber incident, which was particularly emphasized by banks, credit unions and non-deposit-taking financial institutions
  2. a deterioration in the global economic outlook, which was cited most notably by pension funds
  3. a reduction in market liquidity, which was mentioned mainly by asset managers

A new risk that some firms stated they were beginning to track was climate change and extreme weather-related events.

Chart 4: A cyber incident continues to be the most cited risk to firms' activities

Percentage of respondents who cited a given risk in their top three

Note: As part of the question, respondents are asked to list their top three risks. The responses are grouped into different types of risks.

Cyber risk

Cyber risk continues to be cited as the most important risk to both the financial system and firms’ activities. The 2019 spring FSS included a special question to assess both the types and sources of cyber incidents that could severely disrupt critical activities, should they materialize over the next two years.

  • Breaches that could lead to the public release of confidential information is the type of cyber incident that firms are most concerned about. This is a concern particularly for institutions that hold sensitive customer data, such as banks, credit unions and non-deposit-taking financial institutions.
  • Breaches that could corrupt their own data are also an important source of concern.
  • Respondents said they are planning to dedicate the most cyber security resources over the next two years toward protecting themselves against breaches that could lead to the public release of confidential information and loss of access to their data (Chart 5).

Chart 5: Respondents are most concerned about the cyber incidents that could corrupt their data or lead to the public release of confidential information

Percentage of respondents

* For each type of cyber incident, respondents were asked to select one of five options: very concerned, concerned, somewhat concerned, not very concerned, not at all concerned.
** Respondents were asked to select the type of cyber incident that they are planning to dedicate the most cybersecurity resources towards over the next two years.

For the sources of cyber incidents that could indirectly affect their firm’s activities, respondents are most concerned about a cyber incident at a third-party service provider. Unsurprisingly, they also plan to dedicate the most cyber security resources to protecting against this incident source over the next two years (Chart 6).

Chart 6: Respondents are also concerned that a cyber incident affecting a third-party service provider could severely disrupt their own critical activities

Percentage of respondents

* For each source of cyber incident, respondents were asked to select one of five options: very concerned, concerned, somewhat concerned, not very concerned, not at all concerned.
** Respondents were asked to select the source of cyber incident that they are planning to dedicate the most cybersecurity resources towards over the next two years.

Key financial innovations

The survey asked respondents which financial innovations they believe would have the largest impact, positive or negative, on their organizations’ activities over the next three years. It also asked them which innovation they are planning to dedicate the most resources to over that same period (Chart 7).

  • Machine learning and artificial intelligence are the innovations respondents believe will have the largest impact and the area they are planning to dedicate the most resources to, echoing the results of previous surveys.
  • Big data was the second most cited innovation and appears to be the innovation with the most impact for asset managers, compared with other categories of respondents.
  • An increasing number of banks, credit unions and non-deposit- taking financial institutions are citing digitalization, automation and open banking as key innovations, compared with previous surveys.
  • A new development that has emerged is the exchange of collateral to reduce counterparty credit risk for over-the-counter derivatives that are not centrally cleared.

Chart 7: Counterparty collateralization is a new financial innovation that emerged in the spring 2019 survey

Percentage of respondents who cited a given innovation in their top three

Note: As part of the question, respondents are asked to list their top three innovations. The responses are then grouped into different types of innovations.

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