Earlier this month, the Office of the Superintendent of Financial Institutions (OSFI) released its annual risk outlook for 2024 to 2025. Each year, OFSI releases this report, which provides an overview of the current risk environment facing the Canadian financial system. This year, the following items were identified as priority risks:

Real Estate Secured Lending and Mortgage Risks

This risk relates to the high percentage of mortgages that are coming up for renewal prior to the end of 2026 in a much higher interest rate environment. OSFI expects payment increases to lead to higher residential mortgage arrears or defaults, with variable rate mortgages with fixed payments being of specific concern. It is also noted that loan-to-income and loan-to-value ratios of new mortgage originations are at almost record low levels.

Wholesale Credit Risks

These risks, including from commercial real estate lending and corporate and commercial debt, are still a significant exposure for financial institutions. Current interest rates have made refinancing challenging for some borrowers, and OSFI expects there could be a negative impact on the wholesale credit market this year. The move toward hybrid work environments is also noted as a challenge for the office sub-segment of the commercial real estate market.

Funding and Liquidity Risks

There is a persistent concern with liquidity shocks that may occur if there is a dramatic shift in depositor behaviour. The digitalization of banking may result in faster deposit outflows than is expected by some market participants. OSFI expects financial institutions to continue to improve reporting and operational capabilities to be responsive to market disruptions.

Integrity, Security, and Foreign Interference

Finally, OSFI is concerned about threats to the integrity and security of financial institutions, including fraud, cyber security, and foreign interference. It is noted that geopolitical instability can increase the likelihood of these risks materializing, and that public confidence in the Canadian financial system depends on institutions acting with integrity and securing against these kinds of threats.

May 30, 2024