niche investment / Olivier Le Moal

The head of Canada’s banking regulator warned Wednesday of the potential for increased volatility in the global financial system as risks, especially around climate change and digital finances, are on the rise.

“My new responsibility requires that I assume and plan for more frequent volatility storms,” said Peter Routledge in his first speech since he took on the role of Superintendent of Financial Institutions in June.

He said climate change will hit the cash flow generated by some assets and trigger “noticeable changes in valuation,” while cyber attacks are on the rise as finances become increasingly digital.

‘Climate change and digitalization represent the known unknowns in OSFI’s risk environment. As superintendent, I must make plans on the assumption that other macro sources of volatility will emerge from unknown places,“ he said.

Speaking virtually at the Global Risk Institute Annual Summit, he said the risk environment demands a transformation of the regulator’s approach and organization to meet the “extraordinary opportunities and challenges” ahead.

On climate change, Routledge said OSFI has an obligation to ensure Canada’s financial sector and federally regulated pension plans are ready to manage the risks that will come as the economy shifts to net zero by 2050.

The regulator is working with the Bank of Canada and the private sector to better understand the risks that the transition will bring, and is also consulting widely on how to identify, measure and respond to climate-related risks, with more requirements coming, he said.

“Climate risk disclosures and climate risk management by Canadian federally regulated financial institutions will expand materially over my term as Superintendent.”

On the increasingly digital financial sector, Routledge said the regulator will look to balance innovation and stability.

He said the regulator is looking to ease entry of new business models into the regulated space, while also trying to better understand the third-party risks created by some of the new models.

The comments come as the Canadian government is looking at how to move forward on open banking, which would allow the secure sharing of personal banking data with third parties such as financial technology companies.

An advisory committee report released by the Ministry of Finance in August recommended having some level of data-sharing system in place by 2023.

Routledge said the regulator is also looking to increase disclosures around cyber risk, and that it is still working to understand how to respond to cryptocurrencies.

To meet the challenges ahead, Routledge said he will focus the regulator’s transformation on culture, including more emphasis on psychological safety and diversity, and on improved data and an updated supervisory framework.