## Canada: 2019 Financial System Stability Assessment — Executive Summary (1canea2019003)

## Source details

**Canonical URL:** [Canada: 2019 Financial System Stability Assessment — Executive Summary (1canea2019003)](https://www.imf.org/-/media/files/publications/cr/2019/1canea2019003.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2019/1canea2019003.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2019/1canea2019003.pdf.json)

---

### Financial system performance and structure
- System performance:
  - Banking sector: solid profitability and sizeable capital buffers.
  - Insurance sector: financially sound even in the low interest rate environment.
  - System-wide liquidity conditions: stable.
- Nonbank sectors:
  - Pension funds and mutual funds dominate institutional and retail asset management.
  - Nonbank financial intermediation (FSB-defined) reached Can$2 trillion at end-2017.
  - Captive financial institutions and money lenders totalled Can$3.3 trillion (memo note).
- Cross-border footprint and linkages:
  - Major banks, life insurers and pension funds expanded abroad; strong linkages with the United States.
  - Since end-2013, external debt liabilities to GDP increased by 37 percentage points.
  - Banks’ external funding at end-2018: Can$1.1 trillion, two-thirds short-term.
- Size and structure metrics (as of end-2018 / 2018Q3 where noted):
  - Total assets of financial institutions: US$10.2 trillion or 626 percent of GDP.
  - Outstanding debt securities: US$2.2 trillion or 133 percent of GDP.
  - Stock market capitalization: US$1.9 trillion or 119 percent of GDP.
  - Share of financial institutions’ total assets: deposit-taking institutions 45 percent; pension funds 18 percent; mutual funds 17 percent; insurers 13 percent.
  - Insured mortgages: Can$723 billion (2018Q3).
  - Government-guaranteed MBS (NHA MBS): Can$485 billion (2018Q3).
- Concentration:
  - Six largest banks and Québec’s major credit cooperative group (D-SIFIs) account for about 90 percent of deposit-taking sector assets.
  - Three largest life insurers account for about 70 percent of total net premiums.
- Government role in housing finance:
  - CMHC mortgage insurance and backstops for private insurers (subject to 10 percent deductibles); timely payment guarantees for securitization of qualifying insured mortgages.

### Macrofinancial conditions and recent trends
- Growth and projections:
  - Real GDP growth projected: 1.5 percent in 2019 and 1.9 percent in 2020.
  - Medium-term growth expected to slow to around 1.6 percent by 2024.
  - WEO projection for growth: 1.9 (presented alongside growth-at-risk).
- Financial conditions:
  - Overall pricing of risk near historical lows despite monetary policy tightening in 2017 and subsequent accommodative communications.
- Credit and housing:
  - Credit growth moderated to 4.8 percent year-on-year as of 2019Q1.
  - HELOCs have grown rapidly; some feature interest-only payment.
- Household statistics:
  - Households’ net wealth: 489 percent of GDP.
  - Household debt reached 96 percent of GDP at end-2018 (fragment noted in source).
  - Financially weak households: debt-servicing obligation > 40 percent of disposable income.
- Corporate sector:
  - Corporate debt rose to 111 percent of GDP at end-2018.

### Risks, vulnerabilities, and stress assessment
- Key macrofinancial vulnerabilities:
  - Elevated household indebtedness and housing market imbalances driven by low interest rates, low capital charges for mortgage lending, and policies promoting housing affordability.
  - Risk mispricing contributed to debt accumulation among financially weak households; regional concentrations (British Columbia and Ontario) noted.
  - Canada-specific housing finance characteristics may amplify procyclical effects during falling house prices.
- Market-based systemic stress:
  - Analysis of 19 large financial institutions (December 2018) showed joint probability of distress near historical lows; systemic stress measure broadly stable.
  - Potential contagion effects have risen over the past decade due to interconnectedness and common housing exposures.
- Stress testing conclusions:
  - Financial system can manage severe macrofinancial shocks; major deposit-taking institutions would rebuild capital and hold sufficient liquidity to withstand sizeable funding outflows.
  - Mortgage insurers would probably need additional capital and would face some capital shortfalls in a severe adverse scenario.
  - Large life insurers appear somewhat exposed to financial market stress and lower interest rates.
  - Housing finance broadly resilient; non-prime mortgage segment small but vulnerable.
  - Severe downturns would significantly affect financially weak households; corporate sector relatively more robust.

### Stress-testing results — banking, mortgage insurers, life insurers, liquidity
- Bank solvency (D-SIBs and Québec D-SIFI) — adverse scenario:
  - Aggregate CET1 capital ratio decline: 4.8 percentage points to 7.4 percent in 2020, recovering to 9.6 percent in 2021.
  - Cumulative credit-related impairments would reduce aggregate capital ratios by 4.4 percentage points; rise in RWAs would further reduce ratios by 0.8 percentage points.
- Undrawn exposures and HELOCs:
  - Additional credit-related impairments from utilization: Can$18.5 billion (0.9 percent of risk-weighted assets) in sensitivity analysis.
- Dynamic risk-based mortgage pricing:
  - Additional credit-related impairments if lenders widen spreads for weaker borrowers: around Can$14.5 billion.
- Liquidity and funding outflows:
  - Cash-flow analysis: aggregate shortfalls up to Can$91 billion under severe scenarios.
  - Horizon: 3 months; funding outflows under most severe scenario: Can$1.1 trillion (nearly 20 percent of total assets).
  - LCR tests: D-SIFIs would be able to manage large outflows separately across retail or wholesale funding segments and currencies.
- Mortgage insurers:
  - Cumulative insurance claims in adverse scenario: Can$25 billion.
  - Mortgage insurers’ additional capital need to meet supervisory solvency target: Can$15 billion (half for one insurer).
  - Seven D-SIFIs currently have capital buffers for insured mortgage exposures equivalent to 0.17 percent of outstanding insured mortgages.
  - System-wide capital buffers accounting for insurers’ required capital: 1.96 percent (text truncated on needed increase in adverse scenario).
  - Source text: "4.32 percent. This would imply additional capital need of Can$28 billion to cover expected and unexpected losses for insured mortgage exposures."
- Life insurers:
  - Five largest life insurers covered.
  - 2019Q3 (most severe market stress): aggregate core capital ratio decline by 34 percentage points to 61 percent (driven by widening credit spreads and falling equity prices); some entities below regulatory minimums.
  - 2021Q4 (lowest interest rates): aggregate core capital ratio decline marginally by 5 percentage points.
  - A downward parallel shift in the risk-free yield curve by one percentage point would reduce core capital ratio by 40 percentage points.

### Growth-at-risk, adverse scenario, and probabilities
- Growth-at-risk findings (as of 2018Q3):
  - 5 percent probability that real GDP growth would be -1.7 percent or less over the next year.
  - 5 percent probability that real GDP growth would be -1.6 percent (annualized) over the next three years.
- Adverse scenario assumptions:
  - Severe recession with significant financial stress and sharp housing market correction, triggered by disruptions in international trade and global production chains and disorderly global financial adjustments.
  - Domestic: sharp housing market correction, significant financial stress, large currency depreciation.
  - Monetary policy: initial tightening then loosening as recession deepens.
- Scenario projection:
  - Cumulative real GDP growth: -2 percent (annualized) during 2019–21.
  - Growth-at-risk analysis: likelihood of such severe outcome is 3.8 percent.
- House price-at-risk:
  - With a 5 percent probability, average real house price could fall by at least 12 percent year-on-year over the next three years.
  - Potential for larger declines in Toronto and Vancouver.

### Sectoral impacts under the adverse scenario
- Households:
  - Share of household debt-at-risk would increase to 29 percent, up from 17 percent in 2016.
  - Debt-at-risk not covered by assets suggests material financial stability implications.
  - Fragility concentrated in British Columbia and Ontario.
- Corporates:
  - Share of corporate debt-at-risk would increase to 8 percent, up from 5 percent in 2018.
  - Utilities and materials sectors among the most vulnerable; few firms expected to have solvency problems.

### Nonbank financial sector and market vulnerabilities
- Mutual funds and liquidity-run risk:
  - Historical 1st-percentile shock (Shock-A): fund outflows of 7 percent of AUM.
  - BOC framework (Shock-B): fund outflows of 18 percent of AUM following a parallel increase in government bond yields by 100 basis points.
  - Forced liquidation of non-government bonds would amount to 5 percent of that market; estimated liquidity risk premium widening: 93 basis points.
  - Sample funds: Can$323 billion in AUM as of 2018Q3; sample market share: 19 percent of mutual funds’ AUM.
  - Sample funds held 77 percent of corporate bonds held by mutual funds, 25 percent of outstanding Canadian corporate bonds, and 8 percent of outstanding Canadian government bonds.
- Pension funds:
  - Increased exposures to real estate, private equity, private credit; use of complex derivatives and borrowing-based strategies (including short-term repos) increased leverage and liquidity risks.
- Dependence on foreign investors for non-government bond market funding increased significantly.
- Institutional investors’ OTC derivative positions (gross notional) increased across credit, equity, and interest-rate exposures.

### Housing finance vulnerabilities and market structure
- Market shares and segments:
  - D-SIFIs hold about 70 percent market share and focus on prime borrowers.
  - Smaller unregulated or provincially regulated lenders serve non-prime segments and are less resilient.
- Mortgage credit:
  - Total residential and nonresidential mortgage credit: Can$1.8 trillion, or 81 percent of GDP (end-2018).
  - Mortgage credit providers: banks 69 percent; households main borrower share 81 percent (households share noted).
- Structural issues:
  - Cost of prime mortgage financing low and little differentiated by borrower risk.
  - Insurers’ practice of insuring loans that fund insurance premiums (up to 4 percent of principal) compresses costs for riskier borrowers.
  - Growth in HELOCs and uninsured lending noted; HELOCs can be drawn under stress increasing EADs.
  - Core lenders’ constrained responses in stress (constrain new lending, adopt risk-based pricing, limited restructuring ability) could amplify procyclicality.

### Interconnectedness and cross-border exposures
- Cross-border interconnectedness increased across banking, insurance and asset management sectors.
- Significant equity and bond spillovers, especially with the United States (Figures 16 and 17 referenced).
- Derivatives-related liabilities are sizeable and contribute to volatile liquidity profiles; counterparty risk material given sizeable repo books and derivatives exposures (e.g., currency swaps and total return swaps).

### Policy recommendations and key actions (selected, with timeframes and leading agencies)
- Bolstering resilience and systemic risk oversight (NT = near-term; MT = medium-term; * = macro-critical)
  - Raise required capital for mortgage exposures at banks and mortgage insurers; increase risk-based differentiation in mortgage pricing (OSFI, AMF; DOF) — Timeframe: NT; MT *
  - Develop the policy framework for managing a housing market downturn (DOF) — Timeframe: NT *
  - Modernize systemic risk oversight via a federal-provincial platform (HOA) and enhanced transparency (HOA, BOC) — Timeframe: NT *
  - Develop comprehensive systemic risk surveillance and unified data collection; address data gaps (BOC, competent authorities, DOF, provincial governments) — Timeframe: NT/MT *
  - Enhance monitoring of banks’ funding, nonbank risk-taking, housing vulnerabilities, and interconnectedness; Canada-wide surveillance (BOC lead; HOA, SAC; OSFI, AMF) — Timeframe: NT *
  - Strengthen oversight of large public pension funds and increase disclosure transparency (DOF, provincial governments) — Timeframe: NT
- Improving financial sector oversight
  - Strengthen autonomy and governance of financial sector authorities (DOF, provincial governments; BOC; AMF, BCSC, OSC) — Timeframe: MT
  - Complete Cooperative Capital Markets Regulatory System initiative (DOF, provincial governments) — Timeframe: MT
  - Enhance inter-agency cooperation with additional MoUs (OSFI, AMF, provincial authorities) — Timeframe: NT *
  - Address credit risk regulatory and supervisory shortcomings for real estate exposures; adopt common framework to monitor forborne exposures (OSFI, AMF, provincial supervisors) — Timeframe: NT
  - Strengthen legal basis for insurance group-wide supervision and consistent group-side supervision (OSFI, AMF; DOF, Québec government) — Timeframe: NT
  - Complete reforms in OTC derivatives and client duties; focus oversight on high-impact firms and market-wide stress capacity (CSA, provincial governments) — Timeframe: NT
- Strengthening crisis management and safety net
  - Task SAC with overseeing Canada-wide crisis preparedness; strengthen CDIC’s operational independence (MoF; SAC; DOF) — Timeframe: NT *
  - Expand recovery planning to all deposit-taking institutions and resolution planning to critical-function institutions; strengthen resolution powers; adopt depositor preference (OSFI; AMF and CDIC; DOF and Québec government) — Timeframe: NT
  - Operationalize ELA with key provinces; improve testing of ELA operations (BOC; British Columbia, Ontario and Québec governments) — Timeframe: NT *
  - Develop contingency plans for market-wide liquidity support, including securities market intervention and foreign-currency liquidity provision (BOC; DOF, provincial governments) — Timeframe: NT *
- Capital and risk-pricing specifics:
  - Tighten capital requirements for mortgage exposures at lenders and mortgage insurers to reflect through-the-cycle credit risk.
  - Increase risk sensitivity of insurers’ capital requirements or guarantee fees; limit insurance coverage of loans that fund insurance premiums.
- Stress-testing and data:
  - Enhance top-down stress testing for banks and insurers; further develop BOC’s bank solvency stress testing framework; resolve granular data shortfalls for geographic projections.
  - Continue addressing data gaps related to cross-sectoral exposures, unregulated nonbank intermediation, and funding market activities (e.g., securities lending).
- Oversight of large public pension funds:
  - Strengthen detail, standardization and reporting frequency; introduce standardized liquidity stress testing requirements.
- Housing market downturn framework:
  - Develop policy responses that provide countercyclical support while limiting moral hazard.
  - Option: create a professionally managed government-sponsored mortgage reinsurance fund funded by existing guarantee fees.
  - Limit use of portfolio insurance as crisis tool except at punitive premiums; set exposure limits to mortgage insurance and mechanisms to ensure limits respected.

### Financial stability architecture, crisis preparedness, and safety net assessments
- Oversight and legal framework:
  - Financial sector oversight overall high-quality; consolidated supervision captures major overseas operations.
  - Areas for improvement: federal–provincial cooperation, clarity of FMIs oversight roles, stronger supervisory frameworks for real estate credit risk, stronger insurance group-wide supervision, and increased focus on high-impact securities intermediaries.
- Crisis preparedness and safety net:
  - Bank resolution regimes and deposit insurance systems generally aligned with international best practices for federal and Québec jurisdictions.
  - Recovery and resolution planning advanced for major deposit-takers but should be expanded.
  - Valuation framework for compensation should be further developed given likely compensation to bail-in-able debt holders.
  - Adopt depositor preference to facilitate resolution and minimize deposit insurer losses.
  - BOC’s framework for managing liquidity during stress well-defined; indemnity agreements needed to operationalize ELA to provincially regulated institutions.
  - Contingency plans for market-wide support, foreign-currency liquidity and securities market intervention should be further developed.
- Institutional options for systemic risk oversight:
  - First-best: single body with clear mandate and powers for systemic risk oversight.
  - Second-best: formalize and strengthen BOC’s leading role and create federal-provincial platform (HOA) supported by robust transparency.
  - SAC should oversee development and testing of contingency plans in collaboration with provincial authorities.

### Progress on implementing 2014 FSAP recommendations (selected)
- Some progress made; key governance and institutional issues remain unaddressed.
- Data collection and dissemination: Partially implemented; in progress. Main improvements in housing and mortgage data; no single body provides complete systemic-risk data coverage; inadequate data for top-down stress testing.
- Government exposure to mortgage insurance: Implemented; in progress. Insurance-in-force declined to about Can$723 billion as of 2018Q3 from nearly Can$800 billion in 2016.
- OSFI top-down stress testing for banks: Partially implemented; BOC assumed responsibility for top-down bank stress testing.
- Inclusion of major regulated entities in common stress testing: Partially implemented; biannual exercises conducted; results not published.
- OSFI enforcement powers and statutory decision authority: None; authorities do not intend to pursue legislative changes.
- Group-wide insurance supervision: None; authorities do not intend to pursue a transparent, consistent group-wide regime.
- CDIC ex-ante funding: Partially implemented; current ex ante funding 59 basis points of insured deposits, up from 41 basis points in 2013; minimum target 100 basis points.

### Analytical approaches and methodologies (selected appendices)
- Debt-at-risk analysis:
  - Households: financially weak households defined (debt-servicing > 40 percent of disposable income; excessive indebtedness > 450 percent of disposable income; inadequate liquidity = liquid assets < one month of debt servicing).
  - Corporates: financially weak firms defined as EBITDA < interest expenses.
  - Sensitivity analysis: households — decline in income by 15 percent, increase in interest rates up to 230 basis points (depending on renewal profile), decline in house prices by 40 percent; firms — 25 percent decline in EBITDA and 5 percentage points funding-cost increase.
- House price-at-risk and growth-at-risk:
  - Based on Adrian, Boyarchenko and Giannone (2018) growth-at-risk framework; focus on 5-percent tail risks.
- Stress testing frameworks:
  - Bank solvency stress testing: quasi-static balance sheet, three-year horizon (2018Q4–2021Q4), scenario set includes baseline (WEO Oct 2018) and adverse (GFM simulated). Adverse scenario: two years of output contraction with cumulative real GDP growth of -2 percent during 2019–21; likelihood 3.8 percent.
  - Liquidity stress tests: LCR (30-day horizon) and cash-flow analysis (3-month horizon; sensitivity to up to 1 year).
  - Life insurance stress testing: balance sheet approach, three-year horizon, LICAT framework with core and total capital ratio hurdles at 50 percent and 90 percent respectively.
  - Mortgage insurance stress testing: MICAT ratio reporting; supervisory target for MICAT’s capital ratio at 150 percent.
- Calibration notes:
  - PiT PDs and LGDs estimated via HRAM for households and empirical models/Bayesian model averaging for other credit exposures.
  - IFRS 9 expected credit losses projected with stage transition matrices; lifetime expected losses assume return to baseline parameters after 5 years.

*Source: 1canea2019003 - Canada: 2019 Financial System Stability Assessment — Executive Summary (IMF).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 7

### EXECUTIVE SUMMARY

### MACROFINANCIAL CONTEXT
- Financial System Structure (page 10)
- Macrofinancial Conditions (page 11)

### RISK AND VULNERABILITY ASSESSMENT
- Overview (page 12)
- Key Macrofinancial Risks and Vulnerabilities (page 13)
- Banking Sector (page 16)
- Insurance Sector (page 18)
- Risk-Taking in Nonbanks and Markets (page 20)
- Systemic Liquidity (page 21)
- Housing Finance (page 21)
- Interconnectedness (page 22)
- Policy Measures to Bolster Financial Stability (page 23)

### FINANCIAL STABILITY ARCHITECTURE
- Institutional Setting (page 24)
- Systemic Risk Oversight (page 25)
- Crisis Management (page 26)
- Macroprudential Policy (page 27)

### FINANCIAL SECTOR OVERSIGHT
- Institutional and Cross-cutting Issues (page 27)
- Deposit-taking Regulation and Supervision (page 28)
- Insurance Regulation and Supervision (page 29)
- Oversight of Securities Market Intermediaries (page 30)
- Oversight of FMIs (page 31)
- Financial Integrity (page 32)

### SAFETY NET
- Bank Resolution and Deposit Insurance (page 32)
- Liquidity Provision (page 33)
- Other Safety Net (page 34)

### FIGURES (selected)
- 1. Financial System Structure (page 35)
- 2. Macrofinancial Developments (page 36)
- 3. External and Fiscal Vulnerabilities (page 38)
- 4. Household Financial Soundness (page 39)
- 5. Housing Market Developments (page 40)
- 6. Corporate Financial Soundness (page 41)
- 7. Key Macrofinancial Variables in the Baseline and Adverse Scenarios (page 42)
- 8. Banking Sector Performance (page 43)
- 9. Bank Solvency Stress Test Results (page 45)
- 10. Insurance Sector Performance (page 46)
- 11. Risks from Nonbank Financial Sectors (page 47)
- 12. Asset Price Valuations (page 49)
- 13. Systemic Liquidity (page 50)
- 14. Housing Finance (page 51)
- 15. Mortgage Financing Ecosystem (page 52)
- 16. Cross-Border Interconnectedness (page 53)
- 17. International Portfolio Investment (page 54)

### TABLES (selected)
- 1. 2019 FSAP Key Recommendations (page 9)
- 2. FSAP Risk Assessment Matrix (RAM) (page 14)
- 3. Financial System Structure (page 55)
- 4. Selected Economic Indicators (page 56)
- 5. Selected Economies: Key Macrofinancial Variables in the Baseline and Adverse Scenarios (page 57)
- 6. Financial Soundness Indicators (page 58)
- 7. Recent Macroprudential and Housing Finance-related Measures (page 59)

### APPENDICES (selected)
- I. Progress on Implementing the 2014 FSAP Recommendations (page 61)
- II. Analytical Matrix for Macrofinancial Vulnerabilities Analysis (page 65)
- III. Stress Testing Matrix (page 68)
- IV. Analytical Matrix for Systemic Stress and Interconnectedness Analysis (page 84)

### GLOSSARY (selected acronyms)
- AMF Autorité des marchés financiers
- AML/CFT Anti-Money Laundering/Combating the Financing of Terrorism
- AUM Assets under Management
- BCBS Basel Committee on Banking Supervision
- BCP Basel Core Principles for Effective Banking Supervision
- BCSC British Columbia Securities Commission
- BOC Bank of Canada
- CCMRS Cooperative Capital Markets Regulatory System
- CCP Central Counterparty
- CCyB Countercyclical Capital Buffer
- CDIC Canada Deposit Insurance Corporation
- CEO Chief Executive Officer
- CET1 Common Equity Tier-1
- CFIML Captive Financial Institutions and Money Lenders
- CFT Combating the Financing of Terrorism
- CMHC Canada Mortgage and Housing Corporation
- CMRA Capital Markets Regulatory Authority
- CPMI Committee on Payments and Market Infrastructures
- CSA Canadian Securities Administrators
- DIS Deposit Insurance System
- DOF Department of Finance
- DSB Domestic Stability Buffer
- D-SIB Domestic Systemically Important Bank
- D-SIFI Domestic Systemically Important Financial Institution
- EBITDA Earnings before Interest, Taxes, Depreciation and Amortization
- ELA Emergency Liquidity Assistance
- FATF Financial Action Task Force
- FCAC Financial Consumer Agency of Canada
- FICOM Financial Institutions Commission (of British Columbia)
- FISC Financial Institutions Supervisory Committee
- FMI Financial Market Infrastructure
- FSAP Financial Sector Assessment Program
- FSB Financial Stability Board
- FSRA Financial Services Regulatory Authority (of Ontario)
- GDP Gross Domestic Product
- GFC Global Financial Crisis
- HELOC Home Equity Line of Credit
- HOA Heads of Agencies Committee
- ICP Insurance Core Principles
- IFRS International Financial Reporting Standards
- IOSCO International Organization of Securities Commissions
- LCR Liquidity Coverage Ratio
- LGD Loss Given Default
- LICAT Life Insurance Capital Adequacy Test
- LTV Loan-to-Value
- MBS Mortgage-Backed Securities
- MCT Minimum Capital Test
- MICAT Mortgage Insurance Capital Adequacy Test
- MoF Minister of Finance
- MoU Memorandum of Understanding
- NHA National Housing Act
- NPL Nonperforming Loan
- OECD Organization for Economic Cooperation and Development
- OSC Ontario Securities Commission
- OSFI Office of the Superintendent of Financial Institutions
- OTC Over-the-Counter
- PD Probability of Default
- SAC Senior Advisory Committee
- VASP Virtual Assets Service Provider

*Source: 1canea2019003 - EXECUTIVE SUMMARY*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Financial system performance and structure
- The financial system’s performance has been strong: the banking sector has enjoyed solid profitability and sizeable capital buffers; the insurance sector has remained financially sound even in the low interest rate environment.
- Other nonbank sectors have grown considerably, with pension funds and mutual funds dominating the institutional and retail asset management landscape.
- System-wide liquidity conditions are stable.
- Major banks, life insurers and pension funds have expanded their footprints abroad; Canada has strong financial linkages with the United States.
- Key size and structure metrics:
  - Total assets of financial institutions: US$10.2 trillion or 626 percent of GDP (as of end-2018).
  - Outstanding debt securities: US$2.2 trillion or 133 percent of GDP.
  - Stock market capitalization: US$1.9 trillion or 119 percent of GDP.
  - Share of financial institutions’ total assets: deposit-taking institutions 45 percent; pension funds 18 percent; mutual funds 17 percent; insurers 13 percent.
  - As of 2018Q3, insured mortgages amounted to Can$723 billion and government-guaranteed MBS (NHA MBS) amounted to Can$485 billion.
- The financial system is highly concentrated: the six largest banks and Québec’s major credit cooperative group (D-SIFIs) account for about 90 percent of deposit-taking sector assets; the three largest life insurers account for about 70 percent of total net premiums.
- The government plays a central role in housing finance through CMHC mortgage insurance and backstops for private insurers (subject to 10 percent deductibles) and provides timely payment guarantees for securitization of qualifying insured mortgages.

### Macrofinancial conditions and recent trends
- The economy regained momentum after a slowdown caused by low oil prices; real GDP growth is projected to be 1.5 percent in 2019 and 1.9 percent in 2020, with medium-term growth expected to slow to around 1.6 percent by 2024.
- Financial conditions remain loose with overall pricing of risk near historical lows despite monetary policy tightening in 2017 and subsequent communication of an accommodative stance.
- Credit growth moderated in line with the softening housing market: credit growth moderated to 4.8 percent year-on-year as of 2019Q1.
- Home equity lines of credit (HELOCs) have grown rapidly, some featuring interest-only payment; borrowers may use HELOCs to satisfy LTV requirements, consolidate higher-cost debt, or meet regular payments on other loans.

### Risks, vulnerabilities, and stress assessment
- Macrofinancial vulnerabilities remain substantial, notably:
  - Elevated household indebtedness and housing market imbalances have been driven by low interest rates, low capital charges for mortgage lending, and policies promoting housing affordability.
  - Risk mispricing has contributed to debt accumulation among financially weak households, with problems more acute in regions with larger housing market imbalances.
  - Canada-specific housing finance characteristics may amplify procyclical effects of falling house prices due to borrowers’ refinancing pressures and lenders’ sudden adoption of risk-based mortgage pricing.
- Market-based measures indicate systemic stress of financial institutions is low: analysis of 19 large financial institutions as of December 2018 showed the joint probability of several institutions becoming distressed was near historical lows, and the systemic stress measure has been broadly stable. However, potential contagion effects have risen over the past decade, reflecting interconnectedness and/or growing common exposures to the housing market.
- Stress testing conclusions:
  - The financial system would be able to manage severe macrofinancial shocks; major deposit-taking institutions would be able to rebuild capital positions to meet regulatory requirements and hold sufficient liquidity buffers to withstand sizeable funding outflows.
  - Mortgage insurers would probably need additional capital in a severe adverse scenario and would face some capital shortfalls.
  - Large life insurers appear somewhat exposed to financial market stress and lower interest rates.
  - Housing finance is broadly resilient, but the non-prime mortgage lending segment, albeit small, shows some vulnerabilities.
  - During severe downturns, the household sector would be affected with a significant increase in debt belonging to financially weak households, while the corporate sector would remain more robust.

### Policy recommendations and key actions (Table 1: 2019 FSAP Key Recommendations)
- Bolstering the Financial System’s Resilience and Enhancing Systemic Risk Oversight
  - Raise required capital for mortgage exposures at both banks and mortgage insurers to fully account for through-the-cycle credit risk; increase risk-based differentiation in mortgage pricing (OSFI, AMF; DOF) — Timeframe: NT; MT *
  - Develop the policy framework for managing a housing market downturn (DOF) — Timeframe: NT *
  - Modernize the systemic risk oversight framework, underpinned by a federal-provincial platform (potentially, HOA) to discuss systemic issues and formulate policy responses, supported by enhanced transparency (HOA, BOC) — Timeframe: NT *
  - Develop a comprehensive systemic risk surveillance framework, supported by a more unified approach to data collection; address data gaps, particularly related to cross-sectoral exposures, unregulated nonbank financial intermediation, and funding market activities (BOC, competent authorities, DOF, provincial governments) — Timeframe: NT/MT *
  - Enhance risk monitoring of banks’ funding, risk-taking by nonbanks, housing finance-related vulnerabilities, and cross-border and intra-system interconnectedness; carry out Canada-wide surveillance in key sectors such as deposit-taking and insurance (BOC lead; HOA, SAC; OSFI, AMF) — Timeframe: NT *
  - Strengthen oversight of large public pension funds, and increase transparency of their financial disclosures (DOF, provincial governments) — Timeframe: NT
- Improving Financial Sector Oversight
  - Strengthen autonomy and governance of financial sector authorities, including BOC and OSFI (powers), and FICOM (overall); clarify the roles and responsibilities of the authorities in charge of overseeing systemically important FMIs (DOF, provincial governments; BOC; AMF, BCSC, OSC) — Timeframe: MT
  - Complete the Cooperative Capital Markets Regulatory System initiative (DOF, provincial governments) — Timeframe: MT
  - Enhance inter-agency cooperation, particularly between federal and provincial authorities, with additional MoUs (OSFI, AMF, other relevant provincial authorities) — Timeframe: NT *
  - Address shortcomings in the regulatory and supervisory frameworks related to credit risk of mortgage exposures; adopt a common framework to monitor forborne exposures in all jurisdictions (OSFI, AMF, other provincial credit union supervisors) — Timeframe: NT
  - Strengthen legal foundation underpinning insurance group-wide supervision; apply the regulatory framework more consistently to group-side supervision (OSFI, AMF; DOF, Québec government) — Timeframe: NT
  - Complete reforms in the areas of OTC derivatives and duties towards clients; increase the focus of oversight on high-impact firms; ensure the capacity to handle market-wide stress (CSA, relevant provincial governments) — Timeframe: NT
- Strengthening Crisis Management and Safety Net
  - Task the SAC with the responsibility of overseeing Canada-wide crisis preparedness, thus performing the roles of the coordination body at the federal level and the federal coordinator with key provincial authorities; strengthen CDIC’s operational independence (MoF; SAC; DOF) — Timeframe: NT *
  - Expand recovery planning to all deposit-taking institutions and resolution planning to those performing critical functions; strengthen resolution powers; further develop the valuation framework for compensation; adopt depositor preference (OSFI; AMF and CDIC; DOF and Québec government) — Timeframe: NT
  - Operationalize ELA with key provinces; improve testing to ensure smooth ELA operations (BOC; British Columbia, Ontario and Québec governments) — Timeframe: NT *
  - Further develop contingency plans for market-wide liquidity support, particularly intervention in securities markets and foreign-currency liquidity provision (BOC; DOF, provincial governments) — Timeframe: NT *

(Note: Institutions in parentheses are the agencies with leading responsibilities. The * denotes macro-critical. NT = near-term (within one year); MT = medium-term (within 2–3 years).)

### Oversight, legal framework, and crisis preparedness
- Financial sector oversight is high-quality overall, with strong regulatory frameworks and well-structured supervisory approaches; consolidated supervision effectively captures major institutions’ overseas operations.
- Areas for improvement:
  - Further improve cooperation between federal and provincial authorities, supported by additional MoUs.
  - Clarify roles and responsibilities of authorities overseeing financial market infrastructures (FMIs).
  - Strengthen regulatory and supervisory frameworks of deposit-taking institutions regarding credit risk related to real estate exposures.
  - CCMRS initiative can help overcome risks from dispersed oversight of securities markets.
  - Strengthen insurance group-wide supervision, emphasize oversight of high-impact securities market intermediaries, and ensure readiness to handle market-wide stress in securities markets.
- Federal safety net and contingency planning:
  - Bank resolution regimes and deposit insurance systems for federal and Québec jurisdictions are generally aligned with international best practices.
  - Recovery and resolution planning is advanced for major deposit-taking institutions but should be expanded across more institutions.
  - Given likelihood of compensation to bail-in-able debt holders, the valuation framework should be further developed to increase certainty about bail-in outcomes.
  - Adopt depositor preference to facilitate resolution and minimize losses of deposit insurers.
  - Bank of Canada’s framework for managing liquidity during stress is well-defined; indemnity agreements still need to be established to operationalize ELA to provincially regulated financial institutions.
  - Contingency plans for market-wide support—particularly intervention in securities markets and provision of foreign-currency liquidity—should be further developed.
- Modernization of financial stability architecture:
  - A single body in charge of systemic risk oversight would be the first-best solution.
  - Second-best options include formalizing and strengthening the BOC’s leading role in systemic risk surveillance and creating a federal-provincial platform (potentially reconstituting the Heads of Agencies Committee) to discuss systemic risk issues and formulate policy responses, supported by a robust transparency framework.
  - Senior Advisory Committee (SAC) should oversee development and testing of contingency plans for the entire financial system, in collaboration with key provincial authorities.

### Monitoring, data, and emerging vulnerabilities
- Enhanced monitoring is warranted due to emerging vulnerabilities from banks’ external, foreign-currency funding; extensive use of derivatives; rising risk-taking by life insurers, pension funds and other nonbanks; non-prime mortgage lending; and potential spillovers from overseas operations and cross-border exposures.
- Continued efforts to address data gaps are essential for more effective risk monitoring and analysis.

### Key statistic fragment from source
- Household debt reached 96 percent of GDP at end-

*Source: Canada: 2019 Financial System Stability Assessment — Executive Summary (IMF).*

### 2018. Canadian households are among the most indebted in advanced economies. Their debt-

### 1canea2019003 - 2018. Canadian households are among the most indebted in advanced economies. Their debt-

### Household sector and indebtedness
- Households as a whole have net wealth of 489 percent of GDP.
- The share of debt belonging to households with excessive indebtedness or weak debt-servicing capacity has increased significantly over the past decade.
- Financially weak households are defined as households whose debt-servicing obligation is larger than 40 percent of disposable income; debt of these households is considered at risk.
- Sensitivity analysis assumptions for households: decline in income by 15 percent, an increase in interest rates up to 230 basis points (depending on the renewal profile of borrowers), and a decline in house prices by 40 percent.

### Persistent housing market imbalances
- House prices are described as overvalued relative to fundamentals such as income or rent.
- House price-at-risk analysis indicates that overvaluation and tight financial conditions contributed to downside risk to house prices.
- Based on current macrofinancial conditions, a large housing market correction in the medium term is possible:
  - With a 5 percent probability, average real house price could fall by at least 12 percent year-on-year over the next three years.
  - Potential for larger price declines in major cities such as Toronto and Vancouver.

### Corporate sector and corporate debt
- Corporate debt rose rapidly to 111 percent of GDP at end-2018.
- Increase largely driven by debt issuance (including in foreign currency) and non-mortgage borrowing.
- Overall profitability has recovered from the economic slowdown, but firms in the oil and gas and mining sectors continue enduring weak earnings.
- Rapid increase in debt of firms in the real estate sector raises concern given their weak income growth.
- The share of debt belonging to financially weak firms (with publicly available financial statements) is small.
- Financially weak firms are defined as firms whose earnings before interest, tax, depreciation and amortization (EBITDA) is less than interest expense (including capitalized interest); debt of these firms is considered at risk.
- Sensitivity analysis assumptions for firms: income shock (i.e., 25 percent decline in EBITDA) and funding cost shock (i.e., 5 percentage points increase).

### Growth-at-risk and macrofinancial vulnerabilities
- Growth-at-risk analysis captures corporate and household sector vulnerabilities, housing market imbalances, and credit-to-GDP gap.
- As of 2018Q3, the analysis suggests:
  - A 5 percent probability that real GDP growth would be -1.7 percent or less over the next year.
  - A 5 percent probability that real GDP growth would be -1.6 percent (annualized) over the next three years.
- WEO projection for growth: 1.9 (presented alongside growth-at-risk).
- Downside risk to growth has declined over the past year due to some reductions in housing market imbalances and credit-to-GDP gap.

### FSAP Risk Assessment Matrix — key risks and assessed likelihood/impact
- Sharp tightening of global financial conditions:
  - Likelihood: Low/Medium
  - Expected impact: Medium
  - Key channels: tightening of liquidity conditions, increase in funding costs, moderating economic activity in Canada and the U.S., deterioration in banks’ asset quality, losses on investment portfolios, weakening solvency of some financial institutions.
- Weaker-than-expected global growth (including significant China slowdown, rising protectionism):
  - Likelihood: High
  - Expected impact: Medium/High
  - Key channels: impaired debt-servicing capacity of corporates and households, growing vulnerabilities in commodity-related sector, spillovers to regional housing markets, knock-on effects on provincial public finance.
- Sharp house price correction on the back of rising unemployment and higher funding costs:
  - Likelihood: Medium
  - Expected impact: High
  - Key channels: deteriorating asset quality (mortgage lending and real estate financing), ripple effects in financial markets that fund mortgage lending, increase in government’s contingent liabilities through claims on mortgage insurance.
- Cyber-attacks on the interconnected financial system:
  - Likelihood: Medium
  - Expected impact: Medium
  - Assessment: Successful cyber-attacks on a key financial institution could spread widely, but the situation appears manageable given robust financial market infrastructures (FMIs).
- Note on RAM interpretation: “low” indicates probability below 10 percent, “medium” between 10 and 30 percent, and “high” between 30 and 50 percent. RAM reflects staff views as of the time of discussions with the authorities; risks may interact and materialize jointly.

### Adverse scenario and probability
- Adverse scenario assumptions:
  - Severe recession concurrent with significant financial stress and a sharp housing market correction.
  - Initial trigger: disruptions in international trade and global production chains, followed by disorderly financial market adjustments.
  - Tightening global financial conditions lead to global housing market and credit cycle downturns.
  - Domestic impacts: sharp housing market correction, significant financial stress, large currency depreciation in Canada.
  - Monetary policy path: snapback of interest rates (tightened initially to stabilize inflation expectations), loosened in later years due to recession-induced deflationary effects.
- Scenario projection:
  - Cumulative real GDP growth of -2 percent (annualized) during 2019–21.
  - Growth-at-risk analysis suggests the likelihood of such a severe growth outcome is 3.8 percent.

### Sectoral impacts in the adverse scenario
- Household sector:
  - Share of household debt-at-risk would increase to 29 percent, up from 17 percent in 2016.
  - Debt-at-risk not covered by assets suggests material financial stability implications.
  - Fragility more pronounced in British Columbia and Ontario due to higher indebtedness and larger housing market imbalances.
- Corporate sector:
  - Share of corporate debt-at-risk would increase to 8 percent, up from 5 percent in 2018.
  - Firms in utilities and materials sectors among the most vulnerable.
  - While debt-servicing capacity is weak for these firms, only few would have solvency problems.

### Banking sector performance and vulnerabilities
- Overall banking sector:
  - Performance is strong, with solid profitability and sizeable capital buffers.
  - Banks have improved capitalization and benefit from robust revenue-generating capacity based on universal banking even in low interest rate environment.
  - Credit-related impairments have been remarkably low.
  - Large banks have established footprints overseas, particularly in the United States, exposing them to macrofinancial conditions in those markets.
  - Funding appears diversified, largely comprising retail and wholesale deposits.
  - Banks have increasingly relied on foreign-currency funding (slightly more than half of total funding) mainly to fund international operations and to a smaller extent domestic activities.
  - Derivatives-related liabilities are sizeable and have contributed to volatile liquidity profiles.
- Smaller deposit-taking institutions:
  - Some banks rely on less stable brokered deposits.
  - Credit unions’ loan books are concentrated in residential mortgages and could be hard hit following a significant decline in house prices.

### D-SIBs stress test results and capital dynamics
- Coverage: six domestic systemically important banks (D-SIBs) and Québec’s D-SIFI.
- Baseline: solid revenue-generating capacity would contribute to an upward trajectory of capital ratios.
- Adverse scenario:
  - Aggregate common equity tier-1 (CET1) capital ratio would decline by 4.8 percentage points to 7.4 percent in 2020 before recovering to 9.6 percent in 2021.
  - During the stress testing horizon, most entities would tap into capital conservation buffers and be subject to dividend restrictions.
  - By 2021, all entities would meet regulatory minimums (including D-SIFI capital surcharges).
  - Larger credit-related impairments, lower net interest income and non-interest income, and increased risk-weighted assets drive capital depletion in the adverse scenario.
  - Staff stress test results largely aligned with Bank of Canada (BOC) results.
- Contribution to CET1 (2018–21) chart notes:
  - Cumulative credit-related impairments would reduce aggregate capital ratios by 4.4 percentage points.
  - Underlying credit quality deterioration would raise risk-weighted assets and further reduce aggregate capital ratios by 0.8 percentage points.

### Additional loss channels and liquidity
- Undrawn exposures and HELOCs:
  - Sizeable undrawn exposures in the banking book, including HELOCs, could be drawn at time of stress, resulting in additional credit-related impairments of Can$18.5 billion (0.9 percent of risk-weighted assets) according to sensitivity analysis.
- Dynamic risk-based mortgage pricing:
  - If lenders charge larger spreads for financially weaker borrowers, additional credit-related impairments would amount to around Can$14.5 billion.
- Liquidity and funding outflows:
  - Cash-flow analysis identifies small liquidity shortfalls for some entities under severe scenarios, with aggregate shortfalls amounting up to Can$91 billion.
  - The horizon of stress events for the cash-flow analysis would be 3 months; under the most severe scenario, funding outflows would amount to Can$1.1 trillion (nearly 20 percent of total assets).
  - Liquidity Coverage Ratio (LCR) tests confirm similar findings: D-SIFIs would be able to manage large outflows from retail or wholesale funding segments separately, including by significant currencies.
  - Certain vulnerabilities remain: counterparty risk could be material given sizeable repo books and derivatives exposures (e.g., currency swaps and total return swaps); some complex bank-specific risk profiles were not fully assessed due to data limitations.

### Insurance sector stress-testing and vulnerabilities
- Overall performance:
  - Insurance sector performance strong even in low interest rate environment.
  - Return on equity remains stable for life and mortgage insurance sectors but has declined for property-and-casualty insurance sector in recent years.
  - Insurers maintain strong solvency positions, holding some capital buffers in excess of supervisory targets.
  - Three large life insurers have expanded abroad and derive more than half of their net premiums from overseas operations.
- Life insurers stress tests:
  - Covered the five largest life insurers and assessed sensitivity of solvency to macrofinancial conditions in 2019Q3 (most severe financial market stress) and 2021Q4 (lowest interest rates) in the adverse scenario.
  - In 2019Q3, aggregate core capital ratio would decline by 34 percentage points to 61 percent, largely driven by widening credit spreads and falling equity prices.
  - Some entities would see capital ratios below regulatory minimums in 2019Q3.
  - In 2021Q4, aggregate core capital ratio would fall marginally by 5 percentage points.
  - A sustained low interest rate environment poses larger solvency hits; e.g., a downward parallel shift in the risk-free yield curve by one percentage point would reduce the core capital ratio by 40 percentage points.
- Mortgage insurers:
  - Vulnerable to severe macroeconomic downturns with significant house price declines.
  - Stress tests covering all three mortgage insurers indicate cumulative insurance claims would amount to Can$25 billion in the adverse scenario, consistent with credit losses of banks’ insured mortgage portfolios.
  - Mortgage insurers would need additional capital of Can$15 billion to meet the supervisory solvency target; half of this need is for one insurer.
  - The seven D-SIFIs currently have capital buffers for insured mortgage exposures equivalent to 0.17 percent of outstanding insured mortgages.
  - Accounting for mortgage insurers’ required capital for insurance risk, system-wide capital buffers would amount to 1.96 percent. In the adverse scenario, these buffers should go up to (text truncated in source).

*Source: IMF staff estimates and analysis as presented in the provided content unit.*

### 4.32 percent. This would imply additional capital need of Can$28 billion to cover expected and

### 1canea2019003 - 4.32 percent. This would imply additional capital need of Can$28 billion to cover expected and

### Nonbank sector growth, risk-taking, and market vulnerabilities
- Nonbank financial intermediation (FSB-defined) reached Can$2 trillion at end-2017.
- Captive financial institutions and money lenders totalled Can$3.3 trillion (memo note in text).
- Pension funds and mutual funds dominate the institutional and retail asset management landscape.
- Pension funds have increased exposures to real estate, private equity, and private credit and have used complex derivatives and borrowing-based strategies (including short-term repos), increasing leverage and liquidity risks.
- Dependence on foreign investors for non-government bond market funding has increased significantly.
- Institutional investors’ OTC derivative positions (gross notional) increased across credit, equity, and interest-rate exposures (figures shown in text).

### Mutual funds and liquidity-run risk
- Stress-test results for covered mutual funds:
  - Historical 1st-percentile shock implies fund outflows of 7 percent of assets under management (AUM) (Shock-A).
  - BOC framework modeling suggests fund outflows of 18 percent of AUM following a parallel increase in government bond yields by 100 basis points (Shock-B).
- A forced liquidation of non-government bonds would amount to 5 percent of that market (text).
- Resulting liquidity risk premium widening estimated at 93 basis points, which is less than the stress level observed during the GFC (text).

### Insurance sector, mortgage insurance, and capital dynamics
- Life insurers’ holding of debt securities and composition discussed (figures shown); LICAT and other capital metrics presented.
- For mortgage insurance:
  - Total residential and nonresidential mortgage credit amounted to Can$1.8 trillion, or 81 percent of GDP, at end-2018.
  - Mortgage credit providers: banks 69 percent; other financial institutions and households main borrowers 81 percent (households share).
  - Government role: in the adverse scenario the government would need to pay out claims and/or provide capital or other support up to Can$15 billion related to mortgage insurance.
- The text states: "4.32 percent. This would imply additional capital need of Can$28 billion to cover expected and unexpected losses for insured mortgage exposures."
- Mortgage insurers’ required capital should be enough to absorb tail-risk shocks (e.g., the FSAP adverse scenario) (policy recommendation in text).
- Capital requirements for uninsured mortgage lending are described as low and not fully reflective of through-the-cycle credit risk.

### Stress testing and bank/insurer capital implications
- Bank stress testing:
  - Adverse scenario features: output decline by 8 percent by end-2020 and sustained house price decline by about 40 percent (Figure 7 narrative).
  - Credit-related impairments would increase significantly in the adverse scenario, especially for mortgage exposures (Figures and text).
  - Risk-weighted assets for mortgage exposures would increase significantly as unexpected loss rises.
- Mortgage insurers:
  - Severe macrofinancial shocks might create capital shortfalls at mortgage insurers; tighter capital would be required to reflect through-the-cycle credit risk beyond historical Canadian experience.

### Housing finance vulnerabilities and market structure
- Housing finance:
  - D-SIFIs hold about 70 percent market share and focus on prime borrowers; smaller unregulated or provincially regulated lenders serve non-prime segments and can be less resilient.
  - Growth in HELOCs and uninsured lending noted; HELOCs and uninsured mortgage growth highlighted in figures.
  - Cost of prime mortgage financing is low and little differentiated by borrower risk; insurers’ practice of insuring loans that fund insurance premiums (up to 4 percent of principal) compresses costs for riskier borrowers (text).
  - Core lenders’ responses to stress (constraining new lending, adopting risk-based pricing, or limited ability to restructure via extended amortization) could amplify procyclical effects (text).

### Interconnectedness, cross-border exposures, and foreign-currency funding
- Since end-2013, external debt liabilities to GDP increased by 37 percentage points, driven two-thirds by banks and one-third by other non-government entities.
- Banks’ external funding at end-2018 amounted to Can$1.1 trillion, two-thirds of which are short-term.
- Cross-border interconnectedness has risen across banking, insurance, and asset management sectors; Canada shows significant equity and bond spillovers, especially with the United States (Figures 16 and 17 referenced).

### Policy recommendations (text)
- Capital and risk-pricing:
  - Tighten capital requirements for mortgage exposures at lenders and mortgage insurers to properly account for through-the-cycle credit risk.
  - For lenders: consider higher risk weights (e.g., prudential adjustments to credit risk modeling).
  - For mortgage insurers: required capital should absorb tail-risk shocks; increase risk sensitivity of insurers’ capital requirements or guarantee fees; limit insurance coverage of loans that fund insurance premiums.
- Enhanced risk monitoring:
  - Prioritize monitoring of: (i) banks’ external, foreign-currency funding, (ii) extensive use of derivatives, (iii) rising risk-taking by life insurers, pension funds and other nonbanks, (iv) non-prime mortgage lending outside the regulatory perimeter and HELOCs, and (v) spillovers from overseas operations and cross-border exposures.
  - Continue efforts to address data gaps related to cross-sectoral exposures, unregulated nonbank financial intermediation, and funding market activities (e.g., securities lending).
- Stress testing capacity:
  - Enhance top-down stress testing for banks and insurers; further develop BOC’s bank solvency stress testing framework; resolve granular data shortfalls for geographic projections.
- Oversight of large public pension funds:
  - Strengthen detail, standardization, and reporting frequency of financial disclosures; introduce standardized liquidity stress testing requirements.
- Housing market downturn policy framework:
  - Develop policy responses that provide countercyclical support while limiting moral hazard and safeguarding taxpayers.
  - Option: create a professionally managed government-sponsored mortgage reinsurance fund funded by existing guarantee fees.
  - Limit use of portfolio insurance as a crisis management tool except at punitive premiums; identify appropriate exposure limits to mortgage insurance and establish mechanisms to ensure exposures remain within limits.

### Financial stability architecture and institutional recommendations
- Systemic risk oversight:
  - Consider establishing a single body with a clear mandate and appropriate powers for systemic risk oversight; incremental improvements recommended in the interim.
  - The BOC should lead systemic risk surveillance in cooperation with relevant authorities and report risk assessments to inter-agency bodies and in its Financial System Review.
  - Establish a federal-provincial platform for systemic risk issues (HOA could be an option) with expanded membership and redefined terms of reference.
  - Adopt a robust transparency framework detailing agencies’ roles, responsibilities, risk assessments, and policy decisions.
- Crisis preparedness and resolution:
  - Strengthen Canada-wide crisis preparedness; designate SAC to oversee federal crisis preparedness and federal-provincial coordination; adopt written terms of reference for SAC.
  - Strengthen CDIC operational independence and extend resolution regime powers (e.g., interference with contracts, write-down of liabilities and claw-back of remuneration); consider depositor preference adoption.
  - Expand recovery and resolution planning coverage (OSFI and CDIC), including publishing recovery planning guidance and expanding resolution planning to deposit-taking institutions performing critical functions.
- Liquidity provision:
  - Develop contingency plans for market-wide liquidity support, including foreign-currency liquidity and securities market interventions.
  - Jointly develop a strategy (BOC and DOF) for systemic stress in foreign-currency funding, accounting for foreign reserves and standing bilateral currency swap arrangements.
  - Expand ELA simulation exercises and MOUs (BOC–provinces) to operationalize ELA and information sharing.

### Recent macroprudential and housing finance measures (selected from table)
- April 2019: OSFI — domestic stability buffer increased by 25 basis points to 1.75 percent of total risk-weighted assets (effective April 2019).
- January 2018: OSFI — B-20 Guideline revision requiring stress testing of debt-servicing capacity of uninsured mortgage borrowers and disallowing circumvention of LTV limits.
- January 2017: OSFI — risk-based solvency framework for federally regulated mortgage insurers ("Advisory") introduced, raising capital requirements for mortgage insurance.
- Multiple increases in mortgage insurance premiums and guarantee fees by CMHC and DOF between 2014–2018 (table entries).

*Source: IMF staff estimates.*

### Appendix I. Progress on Implementing the 2014 FSAP

### Appendix I. Progress on Implementing the 2014 FSAP Recommendations

### Overall progress summary
- Some progress has been made in implementing the recommendations of the 2014 FSAP, but key governance and institutional issues remain unaddressed.
- OSFI’s practice of using guidelines and its approach to group-wide insurance supervision remain unchanged.
- The authorities disagreed with the need to formalize the arrangement for systemic risk oversight and system-wide crisis preparedness.
- Efforts made to improve data collection and close data gaps, but the lack of a comprehensive framework is a challenge to systemic risk monitoring and analysis.
- Table I.1 summarizes progress on implementing the 2014 FSAP’s key recommendations.

### Financial sector data collection and dissemination
- Recommendation: Expand financial sector data collection and dissemination with a view to enhancing coverage, regularity, and availability of time-series to facilitate analysis.
- Implementation progress: Partially implemented; in progress.
  - Initiatives undertaken to enhance data collection efforts and close data gaps.
  - Main improvements related to housing market and mortgage data.
  - No single body is able to provide data for systemic risk analysis with complete coverage.
  - Inadequate data for top-down stress testing remain a serious shortcoming.

### Government exposure to mortgage insurance
- Recommendation: Reduce the government’s exposure to mortgage insurance gradually.
- Implementation progress: Implemented; in progress.
  - Insurance-in-force has declined to about Can$723 billion as of 2018Q3, from the peak of nearly Can$800 billion in 2016.

### OSFI top-down stress testing for banks
- Recommendation: Augment OSFI’s top-down stress testing framework for banks with risk-sensitive concepts of key credit risk input parameters and econometric, model-based approaches using longer time series.
- Implementation progress: Partially implemented; in progress.
  - The BOC assumed responsibility for conducting top-down bank stress testing and has continued to enhance stress testing capability.
  - OSFI’s top-down stress testing framework mainly focuses on mortgage insurance.
  - Lack of granular data undermines ability to perform top-down stress tests, including estimation of pre-loss income, credit loss and market loss.

### Inclusion of major regulated entities in common stress testing
- Recommendation: Include major regulated entities at federal and provincial level in a regular, common stress testing exercise, involving collaboration between relevant federal and provincial authorities.
- Implementation progress: Partially implemented.
  - OSFI and the BOC have jointly conducted biannual macro stress testing exercises for banks and mortgage insurers.
  - Macrofinancial scenarios were shared with provincial authorities, which independently carry out the exercises; all systemically important deposit-taking institutions were included in the 2017 exercise.
  - Stress testing results have not been published.
  - BOC provided technical assistance to a number of provincial supervisory authorities.

### OSFI enforcement powers and statutory decision authority
- Recommendation: Equip OSFI with powers to make its own enforceable rules by administrative means; amend legislation on statutory decisions to give OSFI sole decision-making authority on prudential criteria.
- Implementation progress: None.
  - Authorities do not intend to pursue this recommendation.
  - Authorities’ response: “OSFI’s guidelines are enforceable in practice because its numerous intervention powers and tools are legally enforceable. OSFI’s use of guidelines provides OSFI with the ability to act independently and quickly in the face of emerging risks.”
  - Mission noted merit of flexibility but cautioned against guideline-only effectiveness in a less benign environment.

### Formalizing reporting requirements
- Recommendation: Replace certain informal and ad-hoc reporting requirements by federally regulated financial institutions with more formal requirements.
- Implementation progress: Partially implemented.
  - OSFI adopted the Regulatory Data Governance Framework for regulatory data management.
  - In 2016, ad-hoc collection of Own Risk and Solvency Assessment (ORSA) key metrics for insurers was replaced with a formal regulatory return.
  - OSFI’s regulatory data are mainly on a consolidated basis and lack consistent information by geography (e.g., Canada and other key markets).
  - OSFI still relies on ad-hoc collection for supervisory purposes.

### Group-wide insurance supervision
- Recommendation: Adopt a transparent and consistent regulatory regime for group-wide insurance supervision; give OSFI authority to take supervisory measures at the holding company level.
- Implementation progress: None.
  - Authorities do not intend to pursue this recommendation.
  - Authorities’ response: “Canada is satisfied with OSFI’s current approach to group-wide supervision.”
  - OSFI relies on undertakings with holding companies to apply prudential requirements and seek information.
  - Mission reiterated importance of a more consistent regulatory regime for group-wide insurance supervision.

### Securities regulation enforcement and systemic risk monitoring
- Recommendation: Address shortcomings in risk identification and enforcement in securities regulation.
- Implementation progress: Partially implemented.
  - Under the auspice of the Canadian Securities Administrators, systemic risk monitoring and analysis in securities markets have been improved.
  - Some successful prosecutions against misconduct have occurred, but authorities should continue deploying a full range of enforcement tools to constitute an effective deterrent.
  - Canada and some provinces and territories (including British Columbia and Ontario) are in the process of establishing the Cooperative Capital Markets Regulatory System; a recent Supreme Court ruling paved a way to move this initiative forward.

### Supervisory cooperation and intensive supervision
- Recommendation: Enhance supervisory cooperation among federal and provincial supervisors and subject all systemically significant financial institutions to intensive supervision.
- Implementation progress: Partially implemented.
  - OSFI increased contact with provincial supervisors to harmonize regulation and improve supervisory cooperation.
  - Current discussions focused on delineating key touch points between federal and provincial supervisors.
  - OSFI and AMF instituted a new cooperation framework with regularly scheduled meetings.
  - Lack of memorandums of understanding (MoUs) between OSFI and provincial supervisors continues to hamper information exchange and policy coordination.
  - AMF designated the largest credit union as a systemically important financial institution.
  - The BOC designated systemically important financial market infrastructures (FMIs).

### Mandate for systemic risk monitoring and crisis preparedness
- Recommendation: Provide a clear mandate to an entity to (i) monitor systemic risk to facilitate macro-prudential oversight, and (ii) carry out system-wide crisis preparedness.
- Implementation progress: None.
  - Authorities do not intend to pursue this recommendation.
  - Authorities’ response: “Responsibility for addressing systemic risk remains with the Senior Advisory Committee, a non-statutory body chaired by the Deputy Minister of Finance.”
  - A new systemic risk assessment committee—a sub-committee chaired by the BOC—was set up.
  - Measures implemented to mitigate housing market vulnerabilities.
  - Individual agencies have conducted crisis simulation exercises; a nation-wide exercise has not been carried out.

### CDIC ex-ante funding and depositor data
- Recommendation: Increase the ex-ante funding of CDIC and enhance its data collection and analysis of depositor profiles.
- Implementation progress: Partially implemented; in progress.
  - Premium rates have been gradually increased.
  - Current CDIC’s ex ante funding is 59 basis points of insured deposits, up from 41 basis points in 2013, with a minimum target at 100 basis points.

---

### Appendix II. Analytical Matrix for Macrofinancial Vulnerabilities

### Debt-at-risk analysis — Corporate sector
- Objective:
  - Quantify the share of financially weak nonfinancial firms, excluding real estate funds.
  - Quantify the share of corporate debt-at-risk.
- Data:
  - Firm-level balance sheet and income statement data (Capital IQ).
- Methodology:
  - Financially weak firms defined as firms with weak debt-servicing capacity and/or inadequate liquidity.
  - Weak debt-servicing capacity: EBITDA less than interest expenses (interest expenses include capitalized interest).
  - Negative equity: assets less than liabilities.
  - Debt of financially weak firms is considered at risk.
  - Debt-at-risk not covered by assets: debt-at-risk that belongs to firms with negative equity.
  - Sensitivity analysis performed to assess income and funding cost shocks, calibrated consistent with the adverse scenario.

### Debt-at-risk analysis — Household sector
- Objective:
  - Quantify the share of financially weak households.
  - Quantify the share of household debt-at-risk.
- Data:
  - Household-level financial information based on representative households from the Survey of Financial Security (Statistics Canada).
  - The Survey of Financial Security was conducted in 1999, 2005, 2012, and 2016.
- Methodology:
  - Financially weak households defined as households with excessive indebtedness, substantial debt-servicing obligations, and/or inadequate liquidity.
  - Excessive indebtedness: debt exceeds 450 percent of disposable income.
  - Substantial debt-servicing obligations: debt-servicing (principal and interest payments) exceeds 40 percent of disposable income.
  - Inadequate liquidity: liquid assets do not cover one month of debt-servicing obligations.
  - Debt of financially weak households is considered at risk.
  - Debt-at-risk not covered by assets: debt-at-risk belonging to households with real estate assets less than mortgage borrowing; real estate assets are haircutted by 10 percent.
  - Sensitivity analysis performed to assess income and funding cost shocks, calibrated consistent with the adverse scenario.

### Indicator of housing market imbalances
- Objective: Assess the extent of housing market imbalances.
- Data:
  - Canadian Real Estate Association
  - Haver Analytics
- Methodology:
  - Housing market imbalances index comprises: house prices (growth of house prices; price to income; price to rent), construction (growth of real construction investment, real residential permit value, dwelling starts, dwelling under construction, and housing completion), inventory and sales (unabsorbed dwellings; sales to new listings), mortgage (growth of real total mortgage and real residential mortgage), and household balance sheet (borrowing and net accounts payable to disposable income; mortgages to nonfinancial assets).
  - Indices based on simple aggregation of above indicators, derived for Canada and some major cities; regional indices may use provincial or national levels depending on data availability.

### House price-at-risk analysis
- Objective:
  - Assess downside risk to future changes in house prices conditional on macrofinancial conditions, and city-level house price valuation and supply factors.
  - Examine key drivers of tail risks to future changes in house prices.
- Data:
  - Bloomberg
  - Canadian Real Estate Association
  - Haver Analytics
  - IMF’s International Financial Statistics
  - Statistics Canada
- Methodology:
  - Based on April 2019 GFSR.
  - Future changes in real house prices forecasted using the growth-at-risk framework proposed by Adrian, Boyarchenko and Giannone (2018).
  - Distribution of future changes in real house prices derived by fitting a parametric skewed t-distribution, using predicted values by quantiles.
  - Quantile regression used to establish city-level relationship between future changes in real house prices and regional factors and macrofinancial conditions; regional factors include house price-to-income. Canada-wide macrofinancial conditions comprise financial conditions, household indebtedness and capital flows.
  - Focus on tail risks—the 5-percent house price-at-risk (i.e., the 5th percentile of the fitted skewed t-distribution), and their key drivers.

### Growth-at-risk analysis
- Objective:
  - Quantify the impact of macrofinancial vulnerabilities on economic growth.
  - Assess downside risk to economic growth conditional on financial conditions and macrofinancial vulnerabilities.
- Data:
  - Bloomberg
  - Canadian Real Estate Association
  - Haver Analytics
  - IMF’s World Economic Outlook database
- Methodology:
  - Based on Adrian, Boyarchenko and Giannone (2018), and Ananthakrishnan Prasad and others (2019).
  - Distribution of future real GDP growth derived by fitting a parametric skewed t-distribution, using predicted values by quantiles.
  - Quantile regression used to establish relationship between future real GDP growth and financial conditions as well as macrofinancial vulnerabilities.
  - Financial conditions capture risk pricing conditions, bank lending conditions, house price growth, and global financial conditions.
  - Macrofinancial vulnerabilities capture corporate and household sector vulnerabilities (indebtedness, leverage and debt-servicing capacity), housing market imbalances, and credit-to-GDP gap.
  - Focus on tail risks—the 5-percent growth-at-risk (i.e., the 5th percentile of the fitted skewed t-distribution), and their key drivers.

---

### Appendix III. Stress Testing Matrix — Bank Solvency Stress Testing

### Institutional perimeter and data
- Institutions included:
  - Seven domestic systemically important financial institutions (D-SIFIs), including six domestic systemically important banks (D-SIBs) and the credit cooperative group in Québec.
- Market share:
  - For six D-SIBs, about 97 percent of banking sector assets (excluding foreign bank branches).
  - For seven D-SIFIs, above 90 percent of total assets of deposit-taking institutions.
- Data and baseline date:
  - OSFI: regulatory returns and supervisory data, supplemented by ad-hoc data collection.
  - AMF: regulatory returns.
  - Statistics Canada: National Household Survey data.
  - Moody’s Analytics: CreditEdge data on corporate default probability (Top-down by FSAP team only).
  - Data as of October 2018.
  - Scope of financial consolidation: group-wide.

### Channels of risk propagation — methodology (BOC top-down and FSAP team top-down)
- Balance sheet approach with projections of key balance sheet, income statement and capital account items.
- Quasi-static balance sheet assumption.
- Net interest income:
  - Projected based on effective interest rates for each interest-sensitive asset/liability segment.
  - Overlays account for repricing profiles and spreads to reflect credit risk and liquidity conditions.
  - FSAP team applies overlays and may apply pass-through constraints in parallel with satellite projections.
- Non-interest income:
  - Split into market-sensitive and non-market-sensitive sources (BOC).
  - Projected based on sensitivity to macrofinancial conditions (FSAP team).
- Operational expenses:
  - Kept at 2018 level but adjusted in terms of foreign-currency composition (FSAP team).
- Credit risk parameters:
  - Granular projections of exposures at default (EADs), probabilities of default (PDs) and losses given default (LGDs) for each asset class and geography.
- Accounting provisions and IFRS 9:
  - BOC: IFRS 9 expected credit losses projected based on a simplified approach (no projected stage transitions).
  - FSAP team: IFRS 9 expected credit losses projected in line with PDs, using a stage transition matrix.
- Market and exchange rate impacts:
  - BOC: impact on P&L and OCI due to FVTPL and FVOCI positions estimated; impact of exchange rate movements on risk-weighted assets, credit losses and pre-provision net income is not assessed.
  - FSAP team: mark-to-market approach used to assess impact of exchange rates, equity prices and commodity prices on net open positions; consolidation accounts for exchange rate movements.
- Risk weighted assets adjusted to reflect overall asset growth and appropriate changes in quality of credit and market exposures.

### Satellite models for macrofinancial linkages
- BOC:
  - Household Risk Assessment Model (HRAM) used to estimate PDs for mortgages and HELOCs.
  - For other exposures, error correction models project consolidated nonperforming loan ratios, translated into PDs per geography using expert judgement.
  - Error correction models used to project effective interest rates.
  - Several empirical models with Bayesian Model Average technique estimate effective interest rates; models may be bank-specific.
  - Simplified conservative approach used to project non-interest income.
- FSAP team:
  - Structural model approach, partially relying on Monte Carlo simulations, used to estimate PDs and LGDs for mortgage exposures.

*Appendix I. Progress on Implementing the 2014 FSAP (and Appendices II–III) — IMF staff report content as provided.*

### 2. Channels of riskpropagation

### 2. Channels of riskpropagation

### Satellite models for macrofinancial linkages
- Several empirical models are used, together with the Bayesian Model Average technique, to point-in-time (PiT) PDs for other credit exposures.
- Models may be bank-specific.

### Stress test horizon and scenario framework
- Stress test horizon: Three years (2018Q4–2021Q4).
- Scenario analysis:
  - Based on two common macrofinancial scenarios.
  - Scenarios specify key macrofinancial variables (e.g., real GDP growth, inflation rate, unemployment rates, exchange rates, equity prices, house prices, interest rates and credit growth) for Canada and important geographies/countries, as well as global variables (e.g., commodity prices).
  - The baseline scenario is based on October 2018 World Economic Outlook (WEO) projections.
  - The adverse scenario is simulated using the Global Macrofinancial Model (GFM). The adverse scenario features a severe recession concurrent with significant financial market stress and a sharp housing market correction. Main triggers: external developments including global trade disruptions, tightening global financial conditions and weaker-than-expected global economic activity, as described in the Risk Assessment Matrix (RAM).
  - Central feature of the adverse scenario: tighter-than-expected monetary policy by some major central banks in response to potential de-anchoring of inflation expectations, induced by disruptions in international trade and global production chains; disorderly monetary tightening would set off significant global financial market stress and global housing market and credit cycle downturns, amplified by existing macrofinancial vulnerabilities such as housing market imbalances and high household debt, resulting in a sharp housing market correction and deterioration in bank asset quality. Significant financial stress would also materialize in Canada.
  - Under the adverse scenario, the Canadian economy would encounter two years of output contraction (2018 and 2019), with cumulative real GDP growth of -2 percent during 2019–21, equivalent to 3 standard deviation. Based on growth-at-risk analysis, its likelihood is 3.8 percent.

### Sensitivity analysis (general)
- A number of sensitivity exercises surrounding the scenario analysis are explored.
- Shocks to household affordability that critically affect PDs of mortgage exposures are simulated under an alternative assumption in which higher-risk borrowers would be asked for some credit spreads to compensate banks for larger capital charges; this would amplify stress on households’ affordability.
- Assessment of the impact on accounting lifetime expected credit loss for Stage II mortgage exposures because of a shorter contractual lifetime vs a longer average amortization lifetime.
- Assessment of the relative impact on losses due to the utilization of committed credit lines in an adverse scenario with no balance sheet restrictions (impact of undrawn EADs).
- Shocks to certain funding (e.g., interbank funding and less stable wholesale/corporate deposits) are simulated with additional spreads for banks to maintain short-term funding under increased uncertainty.
- Shocks to non-interest income are simulated to capture varying degrees of market-sensitive components of non-interest income.
- Credit exposure concentration risk is also assessed, taking into account market structure specificities.

### Risks and buffers (credit, market, income)
- Credit risk:
  - Captures all drawn and undrawn balances associated with on-balance sheet loan portfolios and exposures at amortization cost.
  - Captures all on-balance sheet loan portfolios and exposures at amortization cost. (reiterated)
- Market risk:
  - Reflected in valuation effects of FVTPL and FVOCI positions, as well as net open financial positions (i.e., currencies, equities and commodities).
- Net interest income:
  - Affected by margin implied by asset-side and liability-side interest rates.

### Behavioral adjustments and contagion
- On-balance sheet credit EADs evolve based on credit growth assumption in scenarios, with some adjustments reflecting credit-supply effects dynamics.
- Off-balance sheet credit EADs associated with undrawn balances are assumed to grow in proportion with drawn balances such that utilization remains fixed; all facilities are assumed contractually irrevocable to extend funds in the future. Additional increases in the degree of utilization of undrawn exposures are part of sensitivity analysis.
- EADs linked to securities holdings remain constant.
- In the solvency module, if relevant, maturing assets are replaced by exposures of the same type of risk; maturing capital instruments are generally not allowed to be renewed in the adverse scenario (some exceptions for certain foreign-currency instruments issued by overseas subsidiaries).
- If banks’ capital falls below regulatory requirements, no prompt corrective action is assumed.
- Dividends:
  - Equal to the greater of the most recent historical dividend (2018Q4) or the dividend implied by a fixed ratio of dividends to post-tax net income.
  - Dividends are not reduced unless a breach of the capital conservation buffer occurs; when the capital conservation buffer is breached, restrictions on dividend distribution are in line with the regulatory framework.
- Framework features the contagion module based on the MacroFinancial Risk Assessment Framework (MFRAF) to analyze contagion effects, including interaction between solvency and liquidity conditions.

### Calibration of risk parameters
- Scenario-dependent forward paths for PiT PDs and LGDs are estimated for each asset class and geography based on historical non-performing loan ratios (corporate sector) or a structural model based on microsimulations using the HRAM (household sector).
- Given limited availability of PiT LGD data, some proxies are used.
- For internal ratings-based (IRB) exposures, risk-weight assets are projected on the basis of updated regulatory through-the-cycle (TTC) PDs and downturn LGDs, using appropriate scaling multipliers from the PiT parameters.
- For standardized approach (STA) exposures, risk-weight assets are projected on the basis of constant risk weight densities.
- Estimation of expected credit losses for mortgage exposures is based on projected distributions of debt-servicing ratio (DSR) and loan-to-value (LTV).
- IFRS 9 expected credit losses are projected by estimating stage transition matrices based on projected PiT PDs and historical stage transition rates. Estimation of lifetime expected losses assume a transition to the baseline parameters after a period of 5 years.

### Regulatory and market-based standards (capital hurdles)
- In the baseline, hurdles include the regulatory minimum, the capital conservation buffer, the D-SIFIs surcharge, and the applicable countercyclical capital buffer and/or domestic stability buffer.
- In the adverse scenario, hurdles include the regulatory minimum and the D-SIFI surcharge.
- Hurdle rates are based on the common equity tier-1, tier-1 and total capital ratios.

### Reporting format for results (bank stress testing)
- System-wide evolution of CET1, T1 and total capital ratios.
- Distribution of banks’ capital positions.
- Contribution to key drivers to system-wide net income and capital position, including differences between the baseline scenario and the adverse scenario.
- Number of institutions with capital below the hurdles, and the share of their assets.
- Amount of capital shortfalls.

---

### Bank Liquidity Stress Testing (selected elements)

### Institutional perimeter and data
- Institutions included: Seven domestic systemically important financial institutions (D-SIFIs), including six domestic systemically important banks (D-SIBs) and the credit cooperative group in Québec.
- Market share:
  - For six D-SIBs, about 97 percent of banking sector assets (excluding foreign bank branches).
  - For seven D-SIFIs, above 90 percent of total assets of deposit-taking institutions.
- Data and baseline date:
  - OSFI: regulatory returns based on the Liquidity Coverage Ratio (LCR) and the Net Cumulative Cash Flow (NCCF).
  - AMF: similar regulatory returns.
  - Data as of September 2018.
  - Scope of financial consolidation: group-wide.

### Channels of risk propagation and methodology
- Two types of tests—LCR test and cash-flow analysis.
- LCR test is in line with the standard Basel monitoring tool, featuring total liquidity and liquidity in all significant currencies (Canadian dollar, U.S. dollar, euro, British pound, and Japanese yen).
- Cash-flow analysis analyzes the net cash balance, accounting for available unencumbered assets, contractual cash inflows and outflows, and behavioral flows.
- For the cash-flow analysis, relevant second-round effects could be considered, including margin calls for existing collateral positions, central bank’s liquidity provision, additional asset haircuts due to fire sales, additional repo haircuts due to more limited collateral supply, and wholesale funding market freezes as a result of banks’ solvency and liquidity concerns.
- Satellite models: For the cash-flow analysis, asset haircuts reflect two components: (i) shocks to interest rates and asset prices as captured by the macrofinancial scenarios; and (ii) additional haircuts required by counterparties to accept specific assets as collateral for secured funding transactions.

### Stress test horizon and scenarios
- For the LCR test, the stress test horizon is 30 days.
- For the cash-flow analysis, the horizon of stress events would normally be 3 months. Nonetheless, a set of more persistent stress events (up to 1 year) were considered as sensitivity analysis.
- Scenario analysis for LCR:
  - Three scenarios are considered: (i) a run on retail deposits, with higher run-off rates for retail deposits; (ii) a run on wholesale funding, with higher run-off rates for corporate deposits and other wholesale funding; and (iii) a combination of runs on retail deposits and wholesale funding.
- For the cash-flow analysis, a series of scenarios are considered, with a range from mild to severe liquidity conditions; the cash-flow analysis considers both funding and market liquidity risks.

### Risks, behavioral assumptions, and calibration
- Funding liquidity risk:
  - Reflected in funding run-off rates and asset roll-over rates (the latter providing cash inflows related to non-renewal of maturing assets).
- Market liquidity risk:
  - Reflected in asset haircuts, which could be influenced by market movements, fire sales and collateral supply constraints.
- Behavioral adjustments:
  - Liquidity from the central bank’s emergency lending assistance (ELA) is not considered.
  - The cash-flow analysis may consider some behavioral assumptions about a counterparty’s ability or willingness to transact based on banks’ solvency and liquidity conditions.
- Calibration:
  - LCR tests are based on regulatory and stress parameters.
  - The cash-flow analysis may incorporate relevant second-round effects.
  - Stress funding run-off rates, asset roll-over rates, and asset haircuts are calibrated based on empirical evidence and relevant international experiences.
- Regulatory/accounting and market-based standards:
  - LCR per Basel III; the hurdle at 100 percent.
  - Net cash balance for the cash-flow analysis; to pass, a non-negative net cash balance is required, where the balance reflects net cash outflows and counterbalancing capacity.

### Reporting format for liquidity results
- Changes in the system-wide liquidity position, including important drivers for cash outflows, cash inflows and counterbalancing capacity.
- Distribution of banks’ liquidity positions.
- Number of institutions with LCR below 100 percent and/or negative net cash balance.
- Amount of liquidity shortfalls, including by currencies.

---

### Life Insurance Stress Testing (selected elements)

### Institutional perimeter and data
- Institutions included: Five largest life insurers, including three globally active federally regulated entities and two domestically oriented, provincially regulated entities in Québec.
- Market share:
  - Above 90 percent of life insurers’ total assets.
  - About 80 percent of life insurers’ total net premiums.
- Data and baseline date:
  - OSFI: regulatory returns, supplemented by ad-hoc data collection.
  - AMF: regulatory returns, supplemented by ad-hoc data collection.
  - Data as of December 2018.
  - Scope of financial consolidation: group-wide.

### Methodology and channels of impact
- Balance sheet approach with static balance sheet assumption; assesses the instantaneous impact of macrofinancial shocks on solvency through three main channels.
- Projections of key balance sheet and capital account items by six key geographies (Canada, Europe, Japan, the United Kingdom, the United States and others).
- Mark-to-market approach used to assess impact of macrofinancial shocks on investment portfolios, affecting available capital.
- Assessment of actuarial liabilities due to changes in discount rates as a result of changes in risk-free rates, affecting available capital.
- Adjustments to base solvency buffer made to reflect changes in credit risk and market risk.

### Stress test horizon, scenarios, and sensitivity
- Stress test horizon: Three years (2018Q4–2021Q4).
- Scenario analysis:
  - Based on one macrofinancial scenario—the adverse scenario (simulated using the GFM).
  - Adverse scenario features severe recession concurrent with significant financial market stress and a sharp housing market correction, triggered by external developments (global trade disruptions, tightening global financial conditions, weaker global activity). Central feature: tighter-than-expected monetary policy by some major central banks leading to market stress and housing/credit cycle downturns amplified by domestic vulnerabilities.
  - Under the adverse scenario, Canadian economy encounters two years of output contraction (2018 and 2019), with cumulative real GDP growth of -2 percent during 2019–21, equivalent to 3 standard deviation. Based on growth-at-risk analysis, its likelihood is 3.8 percent.
  - Exercise considers two periods of the adverse scenario: 2019Q3 (most severe financial market stress) and 2021Q4 (lowest interest rates).
- Sensitivity analysis:
  - Alternative assumptions regarding changes in risk-free interest rates that would generate a more material impact are examined.

### Risks, behavioral adjustments, and calibration
- Risks/factors assessed:
  - Market risk and credit risk affect valuation of investment portfolios.
  - Interest rate risk (only changes in risk-free interest rates) affect actuarial liabilities.
- Behavioral adjustments:
  - Surplus allowance is assumed to remain proportional to the present value of liabilities.
- Calibration:
  - Risk-free interest rates and asset prices (credit spreads, equity prices, and house prices) are calibrated in line with the macrofinancial scenario.
  - Yield curves of risk-free interest rates are interpolated based on relevant short-term and long-term government bond yields.
  - Macrofinancial shocks mainly affect available capital and base solvency buffer.

### Regulatory and market-based standards (LICAT)
- Regulatory capital framework based on Canada’s Life Insurance Capital Adequacy Test (LICAT).
- Hurdle rates based on the regulatory minimums for LICAT’s core and total capital ratios at 50 percent and 90 percent, respectively.
- Total capital ratio:
  - Sum of available capital (including both tier-1 and tier-2 capital), surplus allowance and eligible deposits, divided by base solvency buffer.
- Core capital ratio:
  - Sum of tier-1 capital, surplus allowance (only 70 percent), and eligible deposits (only 70 percent), divided by base solvency buffer.

*Source: 1canea2019003 - 2. Channels of riskpropagation*

### 6. Reporting format forresults

### 6. Reporting format for results

### Mortgage Insurance stress-testing: output presentation
- System-wide evolution of MICAT ratio.
- Distribution of mortgage insurers’ capital positions.
- Contribution to key drivers to system-wide net income and capital position, including differences between the baseline scenario and the adverse scenario.
- Number of institutions with capital below the hurdles, and the share of their assets.
- Amount of capital shortfalls.
- Regulatory context and hurdle:
  - Hurdle rates based on the supervisory target for the MICAT’s capital ratio at 150 percent.
  - The MICAT’s capital ratio is based on available capital divided by two-thirds of minimum required capital.
- Relevant numeric and date references preserved from the analysis:
  - Data as of September 2018.
  - Stress test horizon: Three years (2018Q4–2021Q4).
  - Under the adverse scenario: two years of output contraction (2018 and 2019), with cumulative real GDP growth of -2 percent during 2019-21, equivalent to 3 standard deviation. Based on growth-at-risk analysis, its likelihood is 3.8 percent.
  - Institutional perimeter: 100 percent of mortgage insurers’ total assets (all three mortgage insurers, all federally regulated).

### Investment fund stress-testing: output presentation
- Amount of forced corporate bond sales, relative to outstanding amounts of bonds and trading volumes by bond types.
- Resulting price impact on corporate bonds.
- Repetition as reported in source (verbatim items):
  - Amount of forced corporate bond sales, relative to outstanding amounts of bonds and trading volumes by bond types
  - Resulting price impact on corporate bonds
- Key sample and market-share statistics preserved:
  - Sample funds held Can$323 billion in assets under management as of 2018Q3.
  - Market share: 19 percent of mutual funds’ assets under management.
  - Sample funds held 77 percent of corporate bonds (including both financial and nonfinancial issuers) held by mutual funds, 25 percent of outstanding Canadian corporate bonds, and 8 percent of outstanding Canadian government bonds (including subnational issuers).
- Scenario and calibration references preserved:
  - A parallel increase in the yield curve by 100 basis points.
  - Two exogenous redemption shocks calibrated at the fund-level using the first percentile of the historical distribution of monthly fund flows (one combining all funds of a given mandate; one based on each individual fund).

### Cross-cutting reporting items and presentation expectations
- System-wide evolution of core and total capital ratios (general output presentation item listed earlier).
- Distributional outputs: distribution of life insurers’ capital positions (listed in general output presentation section).
- Contribution to key drivers to system-wide capital position (general output presentation item).
- Number of institutions with capital below the hurdles, and the share of their assets (repeated as a core reporting metric).
- Amount of capital shortfalls (reported explicitly for mortgage insurers).
- For mortgage insurers, projected claim payouts are linked to expected credit losses for mortgage exposures under the bank solvency stress tests; changes in insurance risk reflect changes in house prices and thus changes in LTV; mark-to-market impacts on investment portfolios are assessed according to the macrofinancial scenarios.
- Reporting should enable comparison between baseline and adverse scenarios, and decompose impacts into contributions to net income, capital, and regulatory capital ratios.

*Source: 1canea2019003 - 6. Reporting format forresults (PDF chapter content as provided).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2019/1canea2019003.pdf_