Financial markets face a more complex risk environment this year than they did in 2024. The Office of the Superintendent of Financial Institutions’ (OSFI) Annual Risk Outlook, released Thursday, lays out four areas of concern: market integrity and security, wholesale credit, funding and liquidity, and real estate lending and mortgages.
“Consumers and businesses remained resilient as economic growth slowed and unemployment increased [last year],” OSFI said in its report. “While that resilience reflects underlying strengths in our financial system, vulnerabilities remain. Debt levels are elevated, and economic growth is facing headwinds.”
Markets are threatened by a cocktail of geopolitical tension, advances in technology and a greater reliance on third parties that “create vulnerabilities to the integrity and security of Canadian institutions and the financial system,” OSFI said.
Bad actors, some of them state-sponsored, continue to grow more sophisticated in their money laundering, fraud and cyberattack capabilities. OSFI said this trajectory will continue, thanks to advances in artificial intelligence and other technologies.
Private and public-sector institutions have to be more vigilant than ever.
“We observe elevated levels of ransomware, exploited software vulnerabilities and data breaches globally,” OSFI said. “Cyberattacks are constant.”
Credit losses haven’t been a significant issue recently, but that may change this year amidst geopolitical tension and sometimes acrimonious trade negotiations. OSFI noted an increase in private credit firm dealings with federally regulated institutions. “This can introduce additional risks to the industry such as more lenient deal terms with potentially less stringent underwriting standards,” it said.
Dampened risk appetite
Global affairs and a rocky macroeconomic environment have the potential to influence the level of risk that investors are willing to take on this year, OSFI said. The state of things is sufficiently fragile that should this happen, we could see “liquidity shocks,” according to the report.
“If geopolitical and macroeconomic uncertainty worsen and trigger material levels of interest rate, foreign currency or credit volatility, wholesale funding markets could tighten quickly, with reduced access and increased issuance spreads and hedging costs,” OSFI said. “Dysfunctional capital markets would have detrimental effects on the global financial system.”
Finally, borrowing rates remain high enough that homeowners facing mortgage renewals are likely to see an increase in carrying costs. “As of November 2024, 36% of all outstanding mortgages that have yet to experience a payment increase since origination will be up for renewal by the end of 2026,” according to OSFI.
The regulator expects a rise in delinquencies across the country. The pain is likely to be worst in and around Toronto and Vancouver.
“Changes to the economic environment, such as increases in unemployment rates and uncertainty driven by potential U.S. trade protectionism, could lead to more vulnerable segments of the market being unable to service their mortgage debts,” OSFI said.
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