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What Canada’s financial industry fears in 2018

Mark Caplan is president and Alex LaPlante is managing director of research at the Global Risk Institute.

It's that time of year once again to reflect on the past 12 months, and to try to discern what the year ahead holds in store for the Canadian and international financial systems. For better or worse, we see a high degree of consensus on the most likely trouble spots in 2018.

Our views are informed by a recent annual survey of our members, which include many of Canada's top banks, insurance companies, pension funds and asset managers. It turns out that they share some of the same worries that Bank of Canada Governor Stephen Poloz recently described in a speech to the Canadian Club.

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This year, as was the case in 2016, cyberattacks are at the top of the list. Not only has hacking intensified in both frequency and sophistication, but the rapid evolution of cybertechnology is making it increasingly difficult for the financial industry to stay one step ahead of the bad guys.

The integration of the "internet of things" with increased automation means that an ever-growing number of systems and devices are vulnerable to attack, making cybersecurity an ever-bigger challenge and an ever-higher priority.

Our members now cite cyberrisk as their top concern both for the financial system as a whole and for specific institutions. That is hardly surprising, given the costly and widely publicized attacks earlier this year against Equifax, one of the biggest credit-score bureaus, Yahoo and the U.S. Securities and Exchange Commission, among many others.

The second biggest risk identified by our members is the growing level of private debt.

During the third quarter of 2017, Canada's household debt reached a new record of $1.71 for every dollar of disposable income. This trend tells us that many Canadians will struggle to cope with the uptick in interest rates that is a near certainty in the coming year. The consequences could hurt not only borrowers, but also lenders and, indeed, a wide range of consumer-oriented businesses.

Beyond our shores, China continues to experience fast-growing indebtedness, stirring fears that it could be a root cause of the next global financial crisis. Several other countries, including South Korea, Australia and Belgium, face similarly high private-debt ratios.

Young people's access to the job and housing markets remain of concern to many as does the threat posed by speculative crypto-assets, notably bitcoin. While we concur that these could lead to disruption, our members are more worried by the still-rising tide of economic nationalism and trade protectionism.

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Brexit negotiations have thus far resolved little of the uncertainty around the future state of Britain's relationship with the EU, and Catalonia's declaration of independence has created a new source of tension in the region.

Closer to home, North American free-trade agreement renegotiation talks remain a source of considerable uncertainty.

Of course, these aren't the only risks we see for the new year. For example, Canadian real estate prices in major markets have risen rapidly, creating the threat of a housing bubble.

A new generation of nimble financial technology firms, known as fintechs, pose a potential challenge to traditional banks, insurers and other financial institutions. Industry disruption, which received relatively less attention last year in our survey, has risen to be a significant risk for all types of financial-service providers. That said, technology – particularly artificial intelligence and machine-learning advances – also provides substantial opportunities for the financial services sector.

Finally, we should never underestimate the potential for surprises. Fully 95 per cent of respondents to our latest survey expect a "high-impact event" within the next five years, up from 85 per cent last year.

But amid the many uncertainties, let's not forget to count our blessings during this season of goodwill. All advanced economies, including Canada's, have proven remarkably robust, and Canada's financial institutions remain well managed and well capitalized. In the final analysis, we believe the financial system is in position to handle any curve balls 2018 may throw.

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A criminology professor at the University of Montreal outlines how artificial intelligence is used by cybersecurity products in efforts to protect your personal data. But he warns that keeping data safe is still challenging. The Canadian Press
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