Financial System Survey highlights—November 2020

The Bank of Canada conducts the Financial System Survey twice a year to solicit the opinions of senior experts who specialize in risk management in their respective areas 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 autumn survey, completed by 47 respondents, was conducted from September 8 to September 25, 2020. In addition to the set of recurring questions, this survey introduced a set of questions about the impact of and the responses to COVID‑19.

The spring survey was cancelled because its scheduling coincided with the period of intense market stress brought on by the onset of COVID‑19 in March 2020. As a result, all references to “the previous survey” refer to the autumn 2019 survey.

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

Highlights

• Respondents remain confident in the resilience of the financial system, but they reported that the risk of a shock that could impair the financial system has increased.
• A cyber incident and rising defaults in the household/corporate sector were cited as the top two risks, both to individual firms and to the Canadian financial system as a whole.
• Retail trade, accommodation and food services, and real estate are the sectors respondents reported as the most vulnerable to a rise in solvency risk as a result of the COVID‑19 pandemic.
• Respondents reported facing difficulties conducting transactions in financial markets and raising funding at the onset of the crisis.
• Respondents credited policy responses to COVID‑19 by the Government of Canada, the Bank of Canada and the Office of the Superintendent of Financial Institutions for providing essential support to the financial system.

Confidence, risk levels and policy responses to the COVID‑19 pandemic

Among respondents, 98 percent are confident that the Canadian financial system will remain resilient (Chart 1). Respondents frequently cited public sector support in response to COVID‑19 as their reason for remaining confident. Their view of both the amount of support and the speed at which it was implemented was favourable. Respondents also ranked the public sector responses in the order of their effectiveness at stabilizing the financial system (Chart 2).

While the total percentage of respondents reporting confidence remained high, the percentage of respondents who are very confident fell by 9 percentage points from autumn 2019 to 40 percent. As well, the perception of risk—measured by the perceived likelihood of a shock that could impair the financial system—has risen since the previous survey (Chart 3 and Chart 4):

• The percentage of respondents who believe risks have increased materially in the short term (less than one year) rose by 40 percentage points, while the percentage who believe risks have remained unchanged fell by 36 percentage points relative to the autumn 2019 survey.
• The percentage of respondents who believe risks have increased materially in the medium term (one to three years) rose by 20 percentage points, while the percentage who believe risks have remained unchanged fell by 17 percentage points.

The justifications for this increase in risk broadly followed two main themes:

• The economy and financial system are in a more precarious position as a result of the pandemic.
• The public sector may now have limited capacity to intervene further.

The most important risk

Respondents listed the three risks that, if realized, would most harm the functioning of the Canadian financial system (Chart 5). They also listed the three risks that would have the greatest impact on their organization’s activities (Chart 6). 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 risks to the financial system cited most in the autumn 2020 survey are:

• a cyber incident
• rising defaults in the household/corporate sector
• deterioration in the global economic outlook

In addition, 26 percent of respondents cited COVID‑19 without linking it with any other risk.

Disruption of international trade or trade disputes experienced the biggest drop since the previous survey, falling from 29 percent to 6 percent.

The top three cited risks to an organization’s own activities are:

• a cyber incident
• rising defaults in the household/corporate sector
• risks surrounding the low interest rate environment

Moreover, a much larger proportion of respondents cited disruptions in information technology infrastructure as a top risk (21 percent). Respondents frequently mentioned the new work-from-home environment as the main factor driving this response.

Respondents also ranked the top three scenarios associated with the COVID‑19 pandemic that pose the greatest risk to the financial system (Chart 7).

Respondents highlighted the following three scenarios as posing the greatest risk to the financial system:

• a prolonged period of high unemployment1
• a slow recovery in consumer/business spending
• a resurgence of COVID‑19 leading to a re-closing of the Canadian economy

Insights into rising solvency risk

Among respondents, 64 percent are at least somewhat concerned that a rise in solvency risk will severely affect the Canadian financial sector (Chart 8). Pension funds and asset managers (15 respondents) expressed the most concern:

• 67 percent of pension funds are either extremely or moderately concerned
• 56 percent of asset managers are either extremely or moderately concerned

Respondents identified retail trade, accommodation and food services, and real estate as the sectors most vulnerable to a rise in solvency risk due to COVID‑19 (Chart 9).

Market conditions at the onset of the pandemic affected survey respondents

Respondents indicated that, at the onset of the pandemic, they faced considerable difficulties conducting transactions in many financial markets, particularly the Canadian corporate bond and securitized products markets (Chart 10). Pension funds and asset managers reported the greatest difficulty:

• Pension funds had the most difficulty in Canadian money markets (67 percent reported major difficulties) and securitized products (50 percent reported major difficulties).
• Asset managers had the most difficulty in Canadian corporate bonds (67 percent reported major difficulties) and provincial bonds (56 percent reported major difficulties).

Respondents reported that they had difficulties raising funding or rolling over existing funding at the onset of the pandemic. The commercial paper market was the most difficult market to raise funding in (Chart 11). Banks (12 respondents) and pension funds reported the greatest difficulty:

• Banks were most affected by difficulties raising funding using bonds (38 percent reported a high impact) and other short-term unsecured funding (30 percent reported a high impact).
• Pension funds were most affected by difficulties raising funding in commercial paper markets (75 percent reported a high impact).

Endnotes