Risk management

Throughout 2022, risks to the Bank of Canada evolved rapidly. This was largely due to the increasingly complex and volatile external environment, which was characterized by high inflation, war in Europe and broader geopolitical tensions.

Managing risk through uncertainty

Given the challenging context, risk management remained essential to decision- and policy-making activities in 2022. The Bank’s risk management framework played a critical role, as did its three lines of defence, most notably by:

• analyzing new proposals to introduce, calibrate or terminate operations, programs and facilities (first line)
• ensuring that proposed actions align with the Bank’s risk appetite and support risk-informed decisions (second line)
• conducting regular audits to identify insights in support of a broader cycle of continuous improvement (third line)

When the Government of Canada responded to Russia’s unprovoked invasion of Ukraine by imposing sanctions, the Bank quickly implemented an automated screening tool. It screens every payment processed by the Bank to ensure compliance with the sanctions.

Assessing risks to the Bank

The Bank assesses and manages four broad categories of risk:

• financial
• operational
• strategic
• environmental and climate-related

To support its assessment of risk, the Bank updated several of its risk appetite statements. Such statements are important because they establish the level of risk that the Bank is willing to accept as it carries out its business. The Bank also continued to improve its risk management tools and practices. This included expanding risk education and training for employees, who play a key role in managing risk.

Financial risks

In 2022, the Bank’s exposure to financial risks continued to evolve. Its balance sheet grew considerably during the pandemic. The risks associated with the larger balance sheet resulted from the Bank’s pursuit of its monetary policy and financial stability mandates as it undertook extraordinary programs and operations, such as quantitative easing.

The Bank managed market risks through indemnity agreements with the Government of Canada. Nonetheless, after a period of above-average income in 2020 and 2021, the Bank incurred a net loss in 2022. This is because the interest paid on liabilities (settlement balances) was greater than the interest received on assets (mostly Government of Canada bonds). Following a period of net losses, the Bank will return to a net income position. The timing of this return will depend on a number of factors, including the path of interest rates and the evolution of both the economy and the balance sheet.

As part of its monitoring and management of financial risks, the Bank conducted additional quantitative analysis and stress testing of its net income. It also referenced other central bank policies and frameworks.

At the same time, the Bank continued to enhance governance related to the management of financial risks. It also began a review of the tools that support financial risk monitoring and reporting.

Operational risks

In 2022, the ongoing COVID‑19 pandemic made the management of operational risks more challenging. Notably, the Bank continued to conduct a significant volume of operations to support monetary policy and the well-functioning of financial markets. To help mitigate the risks stemming from the high volume of transactions, the Bank:

• made rapid changes to information technology systems
• implemented straight-through processing and robotic process automation solutions
• put in place strategies to help address risks related to people and capacity

Like many employers in Canada, the Bank experienced an increase in people risks. This was due largely to heightened competition for some of the specialized skills the Bank requires. It was also linked to ongoing changes in the work environment resulting from the pandemic. The Bank took steps to address these pressures by:

• setting out new flexible work arrangements as part of its hybrid work model
• introducing targeted enhancements to benefits
• monitoring attraction and retention trends more closely to inform focused responses when necessary

The Bank reached two important milestones related to its governance of operational risk:

• It implemented its third-party risk management program, establishing regular, ongoing monitoring of key external business partners.
• It introduced a policy and framework for managing risks associated with its key models.

Strategic risks

Strategic risks often relate to the Bank’s mandate and functions. They include risks to the Bank’s reputation, which can affect its ability to fulfill its mandate.

In 2022, public scrutiny increased considerably because of high inflation, the extraordinary monetary policy actions the Bank took in response and the losses that resulted from these actions. To help manage this risk, the Bank expanded its engagement with the public through more frequent communication. It used additional communications channels to do so.

Environmental risks

The Bank also continued initiatives aimed at better understanding and managing climate risks. It remained actively involved in discussions with international and domestic partners, helping establish best practices for central banks and other financial sector participants.

In 2022, the Bank enhanced its approach to assessing and disclosing its own climate-related risk exposures. As part of this effort, it launched a new process and framework for quantifying the physical, operational and financial exposures to climate risks it faces.

Looking forward

Risk management will remain integral to the Bank’s decision making in 2023. Continuing to implement the enterprise risk management strategy will be a significant focus. The Bank will also:

• continue to manage the risks associated with its extraordinary market operations and work with external partners to enhance the resilience of the financial sector
• conduct research and select a technology solution that will enable the digitalization of risk management at the Bank
• publish the Bank’s first financial disclosure of climate risks while continuing to develop new climate risk metrics, including forward-looking climate-related scenario analyses for financial assets