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 47 respondents, was conducted between September 24 and October 11, 2019. This survey introduced a set of questions on climate change. Presented here are the highlights of the autumn 2019 FSS and some comparisons to past surveys.

Highlights

  • The overall perception of risk has increased over the past six months, continuing the upward trend from previous surveys. Respondents cited a deterioration in the global economic outlook, a cyber incident and geopolitical risk as key risks to the Canadian financial system. At the same time, confidence in the resilience of Canada’s financial system remains high.
  • Respondents identified different channels through which the physical and transition risks associated with climate change would affect them over the next 10 years. They cited decreases in the value of assets as the main channel for physical risk and damage to reputation as the main channel for transition risk, although there was some variation based on the type of respondent (e.g., banks, pension funds). Respondents cited measurement issues and uncertainty (e.g., speed of climate change, policy developments) as the main obstacles in assessing the impact of climate change on their organization’s activities.

Overall perceived risk and confidence

Among respondents, 63 percent stated there was a slight to material 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). This represents a further increase in risk perceptions compared with the spring 2019 survey, where 40 percent of respondents noted a slight to material increase in risks.

Chart 1: Two out of three respondents say that the probability of a high-impact event occuring has increased

Chart 1: Two out of three respondents say that the probability of a high-impact event occuring has increased

Percentage of respondents

Note: Average from spring 2019 and autumn and spring 2018 financial system surveys

Nevertheless, all respondents are confident that Canada’s financial system is resilient and would withstand an adverse high-impact event if one were to materialize (Chart 2).

Chart 2: Respondents remain confident in the resilience of the Canadian financial system

Chart 2: Respondents remain confident in the resilience of the Canadian financial system

Percentage of respondents

Note: Average from spring 2019 and autumn and spring 2018 financial system surveys

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 autumn 2019 survey were:

  • a deterioration in the global economic outlook,
  • a cyber incident, and
  • a materialization of geopolitical risk-events.

Each of these risks was cited equally.

Disruption of international trade or trade disputes and a reduction in market liquidity were cited more often in this survey than in the spring. Fewer organizations mentioned drops in prices for residential/commercial property.

Chart 3: A deterioration in the global economic outlook, a cyber incident and geopolitical risk were cited as the most important risks to the Canadian financial system

Chart 3: A deterioration in the global economic outlook, a cyber incident and geopolitical risk were cited as the most important risks to the Canadian financial system

Percentage of respondents

Note: As part of the question, respondents were 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 the same as those in the spring 2019 survey:

  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 banks and pension funds
  3. a reduction in market liquidity, which was mentioned mainly by pension funds and asset managers

A new risk that some organizations highlighted was the growth of private equity and private debt as a form of financing in the economy.

Chart 4: A deterioration in the global economic outlook and a cyber incident were cited as important risks to an organization's activities

Chart 4: A deterioration in the global economic outlook and a cyber incident were cited as important risks to an organization's activities

Percentage of respondents

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

Impact of climate change

In past surveys, some organizations highlighted risks posed by climate change, which they had recently started to track. The autumn 2019 survey included a set of questions to assess how participants evaluate the impact of this risk on their organization’s activities.

Organizations identified different channels through which physical and transition risks would affect them over the next 10 years.

  • The main channel for physical risk was through decreases in the value of assets (e.g., through physical damage). This channel was cited by 67 percent of respondents as either important or very important (Chart 5). This is particularly true for organizations that hold long-term assets such as pension funds.
  • The main channel for transition risk was damage to reputation (e.g., negative perception or stigmatization by stakeholders). It was cited by 80 percent of participants as either important or very important (Chart 6). Banks and asset managers were the most concerned by climate-related reputational risk.

Chart 5: Respondents see decreases in the value of assets as the main channel for physical risk

Chart 5: Respondents see decreases in the value of assets as the main channel for physical risk

Percentage of respondents who view these channels as important or very important

Note: Physical risks arise from extreme and more frequent weather-related events such as storms, floods, droughts and wildfires.

Chart 6: Respondents see damage to their reputation as the main channel for transition risk

Chart 6: Respondents see damage to their reputation as the main channel for transition risk

Percentage of respondents who view these risks as important or very important

Note: Transition risks arise from the process of adjustment toward a low-carbon economy.

Issues surrounding metrics and targets (e.g., data availability, classification) and uncertainty (e.g., speed of climate change, policy developments) were perceived as the most important challenges when assessing the impact of climate change on an organization’s activities (Chart 7).

Chart 7: Respondents believe that uncertainty as well as metrics and targets are the greatest challenges when assessing the impact of climate change on their organization’s activities

Chart 7: Respondents believe that uncertainty as well as metrics and targets are the greatest challenges when assessing the impact of climate change on their organization’s activities

Percentage of respondents who view these challenges as the most important

The survey asked respondents to characterize their current degree of climate-related financial disclosure. This included any reporting to government agencies or regulators as well as any reporting in public reports, surveys, websites and social media.

  • Around 60 percent of respondents indicated that they provide considerable or partial disclosure on governance (e.g., internal policies on climate-related risks and opportunities) and strategy (e.g., assessing the actual and potential impact of climate-related risks and opportunities on the organization’s business) (Chart 8).
  • Only 35 percent of respondents stated that they provide the same amount of disclosure on metrics and targets (e.g., standards of measurement used to assess and manage climate-related risks and opportunities). Respondents often mentioned the lack of a common classification as a challenge for disclosure.
  • Among the respondents, 40 percent indicated that they plan to disclose more information across all dimensions in the near future.

Chart 8: 60 percent of respondents provide considerable or partial disclosure on governance and strategy topics related to climate change

Chart 8: 60 percent of respondents provide considerable or partial disclosure on governance and strategy topics related to climate change

Percentage of respondents who provide partial or considerable disclosure