Compliance Risks in Banking: A Growing Concern in Canada

As the global economy continues to face unprecedented challenges, Canadian banks are under increased pressure to manage compliance risks effectively. The Bank of Canada’s 2022 risk management report highlights the importance of robust risk management practices in the face of uncertainty.

Effective Risk Management Framework

In a year marked by high inflation, war in Europe, and broader geopolitical tensions, the Bank of Canada’s risk management framework played a critical role in decision-making activities. The institution’s three lines of defense worked together to:

• Analyze new proposals
• Ensure alignment with risk appetite
• Conduct regular audits to identify insights for continuous improvement

Managing Compliance Risks

The Bank’s efforts to manage compliance risks were further amplified by its response to Russia’s invasion of Ukraine, which led to the implementation of an automated screening tool to ensure compliance with sanctions. The institution assesses and manages four broad categories of risk:

• Financial Risks
  • Exposure to financial risks continued to evolve in 2022, driven by balance sheet growth during the pandemic
  • To mitigate these risks, the Bank conducted additional quantitative analysis, stress testing, and enhanced governance related to financial risk management
• Operational Risks
  • Ongoing COVID-19 pandemic made operational risk management more challenging
  • The Bank implemented rapid changes to information technology systems, introduced straight-through processing, and put in place strategies to address people and capacity risks
• Strategic Risks
  • Strategic risks related to the Bank’s mandate and functions were a significant concern
  • To mitigate these pressures, the Bank expanded its engagement with the public, used additional communications channels, and monitored reputational risk
• Environmental Risks
  • The Bank continued initiatives aimed at better understanding and managing climate risks
  • The institution enhanced its approach to assessing and disclosing its own climate-related risk exposures

Looking Ahead

In 2023, the Bank of Canada will continue to prioritize risk management, focusing on:

• Implementing its enterprise risk management strategy
• Managing extraordinary market operations
• Conducting research on digitalization of risk management

The institution will also publish its first financial disclosure of climate risks and develop new climate risk metrics, including forward-looking climate-related scenario analyses for financial assets.