Ottawa – A decade after the global financial crisis shook the world economy, risks to the Canadian financial sector remain, the Senate Committee on Banking, Trade and Commerce said in a report released Thursday.

While Canada was more successful in weathering the crisis than most other jurisdictions and continues to have one of the soundest financial systems in the world, witnesses cautioned that the shadow banking sector, cyber security risks, high levels of household debt and a lack of insurance for catastrophic events could jeopardize the country’s financial health.

Witnesses said the shadow banking sector — businesses like hedge funds and investment banks that conduct banking-like activities outside of the traditional regulatory environment — has the potential for “liquidity mismatches,” which occur when an institution has insufficient assets to pay out its customers.

Cyber security incidents could create panic and disrupt the financial system, for example, through attacks directed at critical infrastructure systems.

High levels of household debt and historically low interest rates are also a concern. Despite stricter mortgage lending practices introduced since the crisis, the Bank of Canada considers household indebtedness and the imbalance of housing markets to be a key source of domestic risk to the financial system.

Finally, a lack of earthquake insurance in some parts of Canada also poses a risk to the financial sector. Capital requirements with respect to earthquake insurance have been increased, but requirements that are too stringent risk making insurance prohibitively expensive.

In observations included in the report, the committee applauds Canada’s financial sector for its success in navigating a challenging economic period, but cautions that systemic risks continue to exist in the areas outlined above.

Quick Facts

• Witnesses expressed concern that Canada is the only Organisation for Economic Co-operation and Development country not to have a national securities regulator, though not all provinces agree on the need for an entity of this nature. However, the Supreme Court of Canada ruled in a November 2018 reference that a proposed pan-Canadian regulatory system would be constitutional.
• The committee released a detailed study of cyber crime risks in an October 2018 report. The committee heard technological advances may expose additional vulnerabilities in the financial sector.
• The committee heard that systemically important banks — those considered “too big to fail” — are subject to enhanced supervision and increased disclosure requirements to minimize risk. These banks, which include Canada’s major financial institutions, are also subject to a “bail-in regime” to avoid the need for a government bailout, should failure be imminent.

Quotes

“Canada has a world-class financial system and Canadians can be confident that we are prepared to meet the challenges of the future. But we must not remain complacent — there is still work to be done to reduce the risks our report has identified.”

- Senator Doug Black, QC, Chair of the committee

“While we have much to be proud of, the lingering systemic risks to our financial system must be addressed. We need to have effective regulations that protect Canadians’ jobs and savings, while making sure our financial institutions have the autonomy to do business and grow our economy.” 

- Senator Carolyn Stewart Olsen, Deputy Chair of the committee

“Identifying and mitigating systemic risks to the Canadian financial system is not a one-time exercise. We must always be ready to adapt to new realities, and remain vigilant so that we are able to find solutions to potential problems before they arise.” 

- Senator Howard Wetston, member of the committee

Associated Links

• Read the report, Ten Years After the Financial Crisis: An update on systemic risks
• Follow the committee on social media using the hashtag #BANC.
• Sign up for the Senate’s eNewsletter.

For more information, please contact:

Sonia Noreau
Public Relations Officer
Communications Directorate
Senate of Canada
613-614-1180 | sonia.noreau@sen.parl.gc.ca