Top bank watchdog, superintendent Julie Dickson, says that cyber security has become a top priority for the Office of the Superintendent of Financial Institutions (OSFI), along with more traditional risks facing banks.
In a speech to an industry conference in Cambridge, Ont., Dickson said that cyber risk has become one of OSFI’s top concerns. She said that a growing number of North American banks have been hit with denial of service attacks, which are both costly to deal with but, more importantly, can also presage a more serious attack.
“Our concern is growing due to the rapid evolution of cyber attacks in terms of frequency, fire power and targets,” she said, stressing that all financial institutions need to focus on this threat.
A more mundane concern is persistently low interest rates, which squeezes bank margins and revenues, and also pushes banks to fight more aggressively for market share, increase fee income, cut expenses, and take on riskier, higher-yielding assets. Dickson said this has OSFI “very focused on how banks are reacting to current conditions”, and the possible build up of interest rate risk.
These condition have led policymakers, including both OSFI and the federal Finance department, to take measures designed to curb household debt. OSFI says that it has also stepped up scrutiny of the models banks use to determine the amount of capital they have to hold for mortgage loans. But it also wants to see more disclosure from banks. “The lack of information available on risk weights is something we are hoping to address,” she said.
Finally, she noted that it will also be watching to see how well new corporate governance guidelines, which were introduced in 2012, are being implemented, with a particular focus on risk appetite.
“It is at times like these when a regulator gets a good feel for whether a bank really has a solid risk appetite framework,” she said, noting that these sorts of markets can lure banks to develop products that may overlook risks, such as ultra low interest rates.
“Now is when low interest rates and the psychology around them – that there is little risk, along with the misconception that rates cannot go back up in rapid fashion – can lead both borrowers and lenders to overlook certain risks,” she said.
“The effects of low interest rates have set in motion sector-shaping forces to which we must pay attention,” she concluded. “Cyber risk is another issue: Left unchecked, it could seriously impact banking operations. Effective governance and risk appetite statements will help banks determine acceptable and unacceptable risk exposures and to build systems and processes to keep them on track, so that Canadians can continue to enjoy a safe and sound financial system.”