Risk Management Strategies Crucial for Canada’s Financial Institutions Amid Economic Uncertainty
As the Canadian economy continues its recovery from the pandemic, financial institutions are focusing on robust risk management strategies to navigate the uncertain landscape. The Bank of Canada has been at the forefront of this effort, continually reassessing its policies and programs in response to the evolving crisis.
Managing Risk Through Uncertainty
In 2021, the Bank prioritized improving the reliability and robustness of its systems and processes, while also investing in its ability to anticipate and manage emerging risks. The institution’s risk management framework consists of three lines of defence, which were instrumental in adapting to the pandemic’s changing dynamics.
Assessing Risks
The Bank assesses and manages four broad categories of risks:
- Financial Risk: Market, credit, and income risks associated with its expanded balance sheet.
- Methods used to mitigate these risks:
- Securities against lending
- Forward-looking scenario analyses
- Stress testing
- Methods used to mitigate these risks:
- Operational Risk: Increased transaction volumes and cyber risks.
- Measures taken to ensure secure market operations:
- Upgrades to systems
- Automation
- Investments in information technology and processes
- Measures taken to ensure secure market operations:
- Strategic Risk: Shifts in public perception of central banks and external factors.
- Methods used to manage these risks:
- Monitoring the situation
- Clear communication on policy actions
- Methods used to manage these risks:
- Environmental and Climate-Related Risk: Understanding and managing climate-related risks.
- Initiatives taken:
- Developing a strategy for climate risk assessment
- Aligning financial disclosures with international standards
- Initiatives taken:
Looking Ahead
The Bank’s risk management framework will continue to guide its efforts in supporting pandemic recovery. In 2022, the institution plans to:
- Monitor Emerging Risks: Stay ahead of potential threats and adapt its strategies accordingly.
- Implement New Mitigation Strategies: Develop and implement new methods to manage risks effectively.
- Publish a Report on Climate-Related Financial Disclosures: Share its progress and insights with stakeholders.
- Review Core Risk Policies: Improve its defence approach by reviewing and refining its risk management policies.
As Canada’s financial institutions navigate the complex landscape of economic uncertainty, effective risk management strategies will be crucial for their survival and success.