## 1canea2020004

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---

### EXECUTIVE SUMMARY — INTRODUCTION
- Technical Note summarizes review of systemic risk oversight arrangements and macroprudential policy issues undertaken as part of the 2019 Canada FSAP.
- Structure:
  - Section II: existing systemic risk oversight arrangements and potential challenges; steps to modernize framework.
  - Section III: systemic risk surveillance, approaches, and challenges (data gaps, coordination).
  - Section IV: macroprudential policy issues, including toolkit, current policy stance, and overall policy effectiveness.

### SYSTEMIC RISK OVERSIGHT: CURRENT ARRANGEMENT AND ASSESSMENT
- Institutional responsibilities and practice:
  - Responsibility for systemic risk oversight is not explicitly assigned to any specific body.
  - At the federal level:
    - Bank of Canada (BOC) plays a leading role in systemic risk surveillance despite no explicit mandate.
    - Policy discussion occurs at the Senior Advisory Committee (SAC), advising the Minister of Finance (MoF).
    - Powers over macroprudential tools largely lie with MoF and Office of the Superintendent of Financial Institutions (OSFI):
      - MoF can set mortgage insurance rules.
      - OSFI issues prudential guidelines prescribing capital, liquidity, and other requirements for deposit-taking institutions.
  - Significant parts of the financial system lie outside the federal perimeter; some Domestic Systemically Important Financial Institutions (D-SIFIs) are provincially regulated (e.g., Québec’s major credit cooperative group; British Columbia’s credit union central).
  - Provincial governments (British Columbia and Ontario) have implemented housing market measures affecting regional financial stability.
- Assessment:
  - Federal-level systemic risk oversight appears adequately effective, aided by collegial culture and inter-agency cooperation.
  - Effectiveness is less apparent at provincial level and in federal-provincial collaboration.
  - Modernization is needed to address evolving vulnerabilities (nonbank sectors, fintech, complex interconnectedness) and to develop a comprehensive Canada-wide framework.

### RECOMMENDATIONS FOR MODERNIZING SYSTEMIC RISK OVERSIGHT
- Institutional options:
  - First-best: a single body in charge of systemic risk oversight.
  - Second-best: formalize and strengthen the BOC’s leading role in systemic risk surveillance and create a federal-provincial platform to discuss systemic risk and formulate policy responses.
  - Option for federal-provincial platform: reconstitute the Heads of Agencies Committee (HOA) with defined terms of reference and expanded membership to include all relevant provincial prudential regulators.
  - Over time, review whether systemic risk oversight under HOA leadership with no statutory mandate is adequate.
  - The envisaged Capital Markets Stability Act (consolidating systemic risk responsibilities in capital markets at a single body) could strengthen monitoring and managing systemic risk in capital markets and support macroprudential policy for nonbanks.
- Data, surveillance, and transparency:
  - Develop a unified approach to data collection to support Canada-wide systemic risk surveillance.
  - Address data gaps, especially cross-sectoral exposures, unregulated nonbank financial intermediation, and funding market activities.
  - Strengthen technical capacity for systemic risk monitoring and analysis.
  - Support the new arrangement with a robust transparency framework and use the Financial System Review to communicate systemic risk surveillance to the public.

### PROGRESS SINCE 2014 FSAP
- 2014 FSAP recommendations included:
  - Provide a clear mandate to an entity to monitor systemic risk to facilitate macroprudential oversight.
  - Enhance cooperation among federal and provincial supervisors.
  - Expand data collection and dissemination to improve coverage, regularity, and availability of time-series data.
  - Augment top-down stress testing framework with risk-sensitive credit risk input parameters and econometric, model-based approaches using longer time series.
- Recent improvements:
  - Loan-level origination data collected by OSFI and shared with the BOC for D-SIBs since 2013, and for the rest of the federally regulated financial institutions with large residential mortgage exposures since 2015.
  - CMHC started collecting detailed data on Approved Issuers’ uninsured lending activities in March 2018.
  - HOA became a more active platform discussing OTC derivatives, mortgage investment corporations, fintech, and securities market risks.
  - BOC signed MOUs with Manitoba, Québec, and Saskatchewan to enhance cooperation on systemic risk surveillance.
  - OSFI and AMF collaborated to introduce a new solvency framework for life insurers.
- Remaining gaps:
  - MOUs do not exist between OSFI and all provincial authorities, limiting information exchange and policy coordination.
  - Regulatory divergences could cause policy leakages (example: OSFI’s B-20 guideline could cause risk migration to provincially regulated entities if not voluntarily adopted by AMF and major credit unions).

### CCMRS INITIATIVE AND RATIONALE FOR INSTITUTIONAL MODERNIZATION
- CCMRS envisages a single Capital Markets Regulatory Authority (CMRA) responsible for oversight of securities markets in participating jurisdictions and systemic risk surveillance/mitigation for Canada-wide securities markets.
- Two major provinces (Alberta and Quebec) have decided not to participate.
- CCMRS includes:
  - uniform capital markets laws for participating provinces/territories;
  - complementary federal Capital Markets Stability Act (CMSA) to address systemic risk related to capital markets;
  - laws to establish the CMRA.
- Seven provinces/territories participating: British Columbia, Ontario, Saskatchewan, New Brunswick, Nova Scotia, Prince Edward Island, and Yukon.
- Supreme Court’s November 2018 ruling removed legal obstacles; participating jurisdictions are moving forward.
- Given incomplete participation, mechanisms are necessary to ensure effective cooperation between envisaged CMRA and provincial securities regulators.
- Rationale for reform: rapid financial system evolution, emerging nonbank vulnerabilities, and dispersed legal responsibilities hinder a comprehensive Canada-wide framework.

### SURVEILLANCE ARCHITECTURE AND BOC ROLE
- Multiple federal and provincial authorities coordinate through inter-agency arrangements (e.g., SAC, SRAC, HOA, CSA’s Systemic Risk Committee).
- SRAC, chaired by the BOC, identifies, monitors, and assesses systemic vulnerabilities and emerging risks.
- BOC focus areas: household indebtedness, housing market imbalances, bank solvency and liquidity, nonbank financial intermediation, financial markets, and interconnectedness.
- BOC tools and outputs:
  - Macrofinancial Risk Assessment Framework (MFRAF) analyzing solvency-liquidity spillovers and contagion.
  - Full-fledged solvency module analyzing pre-loss income and credit loss.
  - Top-down stress tests for mutual funds holding corporate bonds.
  - Financial System Review (FSR) is key communications instrument; publication frequency reduced from twice a year to annually.
  - Financial System Hub (autumn 2018) strengthened surveillance and public access to analytical work.
- Surveillance work extends beyond existing Bank of Canada Act and Payment Clearing and Settlement Act mandates.

### SURVEILLANCE GAPS, PRIORITIES, AND SYSTEMATIC COVERAGE NEEDS
- Need for systematic, system-wide surveillance covering deposit-taking and insurance where supervisory responsibilities are fragmented.
- Improved but incomplete surveillance of securities markets and nonbank financial intermediation since 2014 FSAP; data gaps persist.
- Key aspects to consider systematically:
  - Risk-taking by institutional and retail investors (life insurers, pension funds, investment funds) in low interest rate environment.
  - Overseas exposures and cross-border spillovers (e.g., United States); increases in external funding, foreign-currency liabilities, and OTC derivatives.
  - Intra-system interconnectedness: repo and OTC derivatives links between banks and nonbanks; mortgage financing links among lenders, insurers, and ultimate investors.
  - Common exposures to housing market and housing finance: mortgages amounting to Can$1.8 trillion, or around 79 percent of GDP; life insurers and pension funds increased investment in commercial real estate.
  - Elevated household debt and housing market imbalances pose substantial vulnerabilities; government role in backstopping housing finance creates contingent liabilities.

### DATA GAPS AND PRIORITIES FOR RISK MONITORING
- Key data gaps: cross-sectoral exposures, unregulated nonbank financial intermediation, and funding market activities.
- Examples of missing coverage:
  - Bond and repo transactions beyond IIROC’s government securities dealers coverage.
  - Asset holdings of unregulated nonbank intermediaries (mortgage finance companies, mortgage investment companies, hedge funds, private equity funds, nonbank broker dealers).
  - OTC derivatives, securities lending, and cross-border investment activities and exposures.
- Recommendation: conduct comprehensive assessment of data gaps and address them swiftly to support systemic risk assessment.
- High-priority data needs (Appendix III highlights):
  - Repurchase agreements beyond IIROC; collateral reuse and tri-party repo. (Priority: High)
  - National view of derivatives (OTC and exchange): trade repository and granular CCP data. (Priority: High)
  - National credit registry with loan terms, borrower characteristics, lender identifier. (Priority: High)
  - National property and land transaction registry harmonized across provinces. (Priority: High)
  - Cross-border and cross-sector exposure data. (Priority: High)
- Suggested improvements for large pension funds:
  - Increase detail, standardization, and reporting frequency of financial disclosures.
  - Introduce standardized liquidity stress testing requirements.

### MACROPRUDENTIAL TOOLKIT, STANCE, AND ISSUES
- Federal remit and authorities:
  - OSFI: authority over bank capital and liquidity requirements, systemic risk buffers, D-SIB capital surcharge, other prudential tools for federally regulated financial institutions.
  - MoF (DOF advises MoF): can set mortgage insurance rules within government-backed mortgage insurance arrangement.
  - CMHC (with MoF approval): can adjust mortgage insurance premiums and guarantee fees for National Housing Act mortgage-backed securities and Canada Mortgage Bond.
  - Provincial governments: property-related taxes and prudential tools for provincially regulated financial institutions; can designate D-SIFIs.
- Policy coordination typically at SAC at federal level; better coordination with provinces warranted.
- Policy leakage: some federal measures are not applied to provincially regulated entities, causing leakages.
- Key measures and calibrations:
  - D-SIB capital surcharge introduced March 2013 (effective January 2016): equivalent to 1 percent of risk-weighted assets applied to six D-SIBs.
  - Domestic stability buffer (DSB) announced June 2018 as a Pillar 2 requirement.
  - Leverage ratio requirement implemented November 2014, consistent with Basel III.
  - Foreign-currency liquidity: monitoring of liquidity coverage ratios (LCRs) by significant currencies.
- DSB timeline and calibration:
  - December 2018: DSB raised by 25 basis points to 1.75 percent of total risk-weighted assets, effective April 2019.
  - June 2019: DSB raised to 2 percent, effective October 2019.
- Countercyclical capital buffer (CCyB):
  - CCyB for exposures in Canada can be set between 0 and 2.5 percent of risk-weighted assets; framework elements include OSFI assessment in consultation with SAC.
  - CCyB operational status: has so far been at zero.
- OSFI B-20 Guideline revisions (2018):
  - Extended stress-testing to uninsured mortgage borrowers accessing fixed-rate loans with low LTV and maturity beyond 5 years.
  - Borrowers must service obligations if interest rates increase by 2 percentage points or reach the Bank of Canada 5-year fixed posted mortgage rate (whichever is higher).
  - Enhanced LTV measurement and limits; restrictions on “co-lending” designed to circumvent LTV limits.
- MoF / CMHC mortgage insurance rules and changes (selected):
  - HELOCs are ineligible for mortgage insurance.
  - December 2015 (effective February 2016): minimum down payment increased from 5 to 10 percent on portion of house value exceeding $500,000 (5 percent remained for properties up to $500,000).
  - October 2016: stress-testing requirement for insured mortgage borrowers introduced.
  - November 2016: rules for high-ratio mortgages extended to portfolio insurance of low-ratio mortgages.
  - Amortization period limit remains at 25 years (set in 2012).
  - CMHC increased insurance premium for borrowers with down payments between 5 and 25 percent, effective March 2017.
  - CMHC introduced a 0.01 percent administration fee on portions of an issuer’s unused NHA MBS guarantee allocations beyond threshold in April 2017.
  - Provincial measures include foreign buyers stamp duties and vacant home taxes.

### MACROPRUDENTIAL STANCE, EFFECTIVENESS, AND POLICY ISSUES
- Recent developments and indicators:
  - Credit growth moderated to 4.8 percent year-on-year as of 2019Q1.
  - Credit-to-GDP gap narrowed; household debt-to-gross disposable income stabilized.
  - Banks’ new lending to highly indebted borrowers fell sharply; insured mortgage lending reduced; house prices broadly stable; construction/inventory/sales/mortgage lending no longer indicate overheating.
- Assessment:
  - Current macroprudential stance broadly adequate given declining macrofinancial vulnerabilities.
  - OSFI B-20 revision (effective January 2018) and measures in Alberta, Saskatchewan, Québec improved underwriting standards for uninsured mortgages.
  - Overall stance relatively tight, including six rounds of tightening mortgage insurance rules by DOF (last around end-2016).
- Evidence on effectiveness:
  - IMF (2017) finds compelling evidence that three of the six rounds of tightening between 2008 and 2016 on mortgage insurance rules were effective in reducing mortgage credit growth.
  - BOC analytical note: fewer low-ratio mortgages originated to highly indebted borrowers in 2018 compared to previous year; mortgage activity significantly slowed (revision of B-20 coincided with a substantial increase in interest rates).
  - Microsimulation and Survey of Financial Security: mortgage demand of first-time buyers more sensitive to LTV limits than policies targeting debt service ratio.

### POLICY RECOMMENDATIONS TO ADDRESS LEAKAGES AND EMERGING RISKS
- Expand macroprudential toolkit coverage:
  - Extend macroprudential measures to cover all mortgage lending irrespective of lender (including provincially regulated lenders and unregulated nonbank lenders) to limit policy leakages.
  - Expand scope to address risks from lending by nonbank financial institutions and to limit policy leakages (DOF).
  - Develop prudential instruments to deal with HELOCs and other risky mortgage products (DOF, OSFI).
  - Expand application of cyclical capital requirements to all deposit-taking institutions (OSFI, provincial supervisors).
  - Consider making the Domestic Stability Buffer (DSB) a Pillar 1 requirement (currently Pillar 2) and extend it to other deposit-taking institutions.
- HELOC-specific issues and suggestions:
  - HELOCs present significant undrawn exposures; FCAC survey findings:
    - "Less than 15 percent of respondents were aware that the bank can increase a HELOC’s interest rate at its discretion."
    - "More than 60 percent of the HELOC holders did not know that the lender can require the borrower to repay a HELOC at any time."
    - "A quarter of the borrowers would struggle if their HELOC payments would increase by 100 Canadian dollars or less."
    - "In the case of federally regulated financial institutions, two out of five outstanding loans secured with real estate assets are HELOC-type loans."
  - Suggested HELOC measures:
    - Consider limiting access to HELOCs to borrowers with a total debt-to-income ratio below a certain threshold (example threshold cited: below 300 percent).
    - Calibrate thresholds based on distribution of household indebtedness and associated risks.
  - Note: HELOCs cannot be mortgage insured; maximum HELOC amount capped by LTV limit at 65 percent.
- Cyclical capital buffers application:
  - Apply cyclical capital buffer measures to all deposit-taking institutions, including large credit unions and mid-sized banks.
  - Options: make DSB a Pillar 1 requirement; if not feasible, activate CCyB at appropriate level for all regulated deposit-taking institutions.
  - Context: DSB is Pillar 2; CCyB, D-SIB surcharge and capital conservation buffer are Pillar 1 buffers (breaches entail automatic constraints on dividend distribution).

### REGIONAL HETEROGENEITY AND DIFFERENTIATED POLICIES
- House price-at-risk analysis shows significant variability across cities.
- Recommendation: consider regional heterogeneity when designing macroprudential policies.
  - Examples: vary LTV limits or debt service criteria across regions; impose tighter debt service stress tests in higher-risk regions; tighter borrowing limits for homeowners with multiple properties.
- International precedent: regional differentiation implemented in Norway and South Korea.

### FINANCIAL SYSTEM STRUCTURE AND KEY QUANTITATIVE STATISTICS (Appendix II highlights)
- As of end-2018:
  - Total assets of financial institutions: US$10.2 trillion or 626 percent of GDP.
  - Outstanding debt securities: US$2.2 trillion (133 percent of GDP).
  - Stock market capitalization: US$1.9 trillion (119 percent of GDP).
- Composition of financial institutions’ total assets (approximate shares):
  - Deposit-taking institutions: 45 percent.
  - Pension funds: 18 percent.
  - Mutual funds: 17 percent.
  - Insurers: 13 percent.
- System growth and internationalization:
  - Total assets increased by 31 percent (since end-2013).
  - Banking sector claims on nonresidents increased to 41 percent of banking sector assets (from 31 percent).
  - International portfolio investment assets reached 95 percent of GDP (from 60 percent).
- Market and concentration features:
  - Banks finance about two-thirds of private sector credit.
  - 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.
- Funding and markets:
  - Foreign-currency debt securities increased from 26 percent to 34 percent.
  - Bond markets expanded by about 39 percent since end-2013.
- Housing finance and government role:
  - Insured mortgages amounted to Can$723 billion and government-guaranteed MBS (NHA MBS) amounted to Can$485 billion as of 2018Q3.
  - Mortgages total Can$1.8 trillion, or around 79 percent of GDP.

### HOUSEHOLD INDEBTEDNESS AND HOUSING MARKET IMBALANCES (Appendix V highlights)
- Summary vulnerabilities:
  - Elevated household indebtedness and housing market imbalances remain substantial and pose financial stability concerns.
  - Drivers: decades-long credit upcycle, low interest rates, low capital charges for mortgage lending, and policies promoting housing affordability.
- Recent developments and tail risks:
  - Credit growth moderated to 4.8 percent year-on-year as of 2019Q1.
  - Growth-at-risk (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.
- Household balance-sheet metrics and valuations:
  - Household debt: reached 96 percent of GDP at end-2018.
  - Household net wealth: 489 percent of GDP.
  - Canada-wide house prices increased by more than 20 percent in real terms over the past decade.
  - House price-at-risk (medium term): 5 percent probability average real house price could fall by at least 12 percent year-on-year over the next three years.
- Regional heterogeneity:
  - British Columbia and Ontario face more heightened financial stability risks given larger household debt-at-risk and greater downside risk to house prices.
  - Toronto and Vancouver metro areas are overvalued based on house price-to-income indicators; these cities face larger downside risk.

### GOVERNMENT-BACKED MORTGAGE INSURANCE RULES (Appendix IV highlights)
- Government-backed mortgage insurance rules (2019):
  - Amortization period limit: 25 years
  - Minimum down payment for new mortgages: 5 percent for the first $500,000 and  
    10 percent for the portion above $500,000
  - Refinancing mortgages: Non-insurable
  - High-ratio investment properties: Non-insurable in high-ratio
  - Low-ratio investment properties: Single-units non-insurable; 2–4 units are insurable with LTV ≤ 80 percent
  - Debt-service ratio limits:
    - Gross-debt-service (GDS): 39 percent
    - Total-debt-service (TDS): 44 percent
  - Stress test qualifying rate for insured mortgages: Greater of: (i) the contractual mortgage rate, or (ii) the Bank of Canada 5-year fixed posted rate
  - Maximum property value to qualify for insurance: $1,000,000
  - Credit score: ≥ 600, with a 3 percent exception bucket
- Revision of government-backed insurance rules (2016):
  - LTV limit for new mortgages tightened from 95 to 90 percent on portion above $500,000 (effective February 15, 2016).
  - Debt service criteria expanded to all borrowers using higher of contractual rate or Bank of Canada 5-year posted rate (effective 17 October 2016).
  - Rules for high-ratio mortgages extended to portfolio insurance of low-ratio mortgages (effective November 30, 2016).
- Revision of OSFI B-20 guideline (2018):
  - Stress test for uninsured mortgages: greater of: (i) contractual mortgage rate +2 percent, or (ii) Bank of Canada 5-year fixed posted rate.
  - OSFI requires dynamic, risk-reflective LTV measurement and limits.
  - OSFI restricts lending arrangements designed to circumvent LTV limits (no “co-lending”).

### TABLED RECOMMENDATIONS ON SYSTEMIC LIQUIDITY ISSUES (EXTRACT)
- Modernize systemic risk oversight framework, underpinned by federal-provincial platform (potentially HOA) and enhanced transparency (HOA, BOC)
  - Priority: H
  - Timeframe: I
- Develop comprehensive systemic risk surveillance framework, supported by unified data collection and strategic plan (BOC lead, HOA)
  - Priority: H
  - Timeframe: I
- Address data gaps related to cross-sectoral exposures, unregulated nonbank intermediation, and funding market activities (BOC, competent authorities, DOF, provincial governments)
  - Priority: H
  - Timeframe: NT
- Strengthen technical capacity for systemic risk monitoring and analysis (BOC, competent authorities)
  - Priority: M
  - Timeframe: NT
- Use the Financial System Review to communicate systemic risk surveillance to the public (BOC)
  - Priority: M
  - Timeframe: I
- Expand macroprudential toolkit to address risks from nonbank lending and limit policy leakages (DOF)
  - Priority: M
  - Timeframe: I
- Develop prudential instruments to deal with HELOCs and other risky mortgage products (DOF, OSFI)
  - Priority: M
  - Timeframe: I
- Expand application of cyclical capital requirements to all other deposit-taking institutions (OSFI, provincial supervisors)
  - Priority: M
  - Timeframe: I

*Source: EXECUTIVE SUMMARY and selected chapters and appendices from the Technical Note, Canada FSAP.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### INTRODUCTION
- This Technical Note summarizes the review of systemic risk oversight arrangements and macroprudential policy issues undertaken as part of the 2019 Canada FSAP.
- Structure:
  - Section II: existing systemic risk oversight arrangements and potential challenges; steps to modernize framework.
  - Section III: systemic risk surveillance, approaches, and challenges (data gaps, coordination).
  - Section IV: macroprudential policy issues, including toolkit, current policy stance, and overall policy effectiveness.

### SYSTEMIC RISK OVERSIGHT: CURRENT ARRANGEMENT AND ASSESSMENT
- Key findings on institutional responsibilities and practice:
  - The responsibility for systemic risk oversight is not explicitly assigned to any specific body.
  - At the federal level:
    - The Bank of Canada (BOC), albeit with no explicit mandate, plays a leading role in systemic risk surveillance.
    - Policy discussion takes place at the Senior Advisory Committee (SAC), which advises the Minister of Finance (MoF).
    - Powers over macroprudential tools largely lie with the MoF and the Office of the Superintendent of Financial Institutions (OSFI).
      - MoF can set mortgage insurance rules.
      - OSFI issues prudential guidelines prescribing capital, liquidity, and other requirements for deposit-taking institutions.
  - Significant parts of the financial system lie outside the federal perimeter; some Domestic Systemically Important Financial Institutions (D-SIFIs) are provincially regulated (e.g., Québec’s major credit cooperative group; British Columbia’s credit union central).
  - Provincial governments (British Columbia and Ontario) have implemented housing market measures that affect regional financial stability.
- Assessment:
  - Federal-level systemic risk oversight appears adequately effective, aided by strong collegial culture and inter-agency cooperation.
  - Effectiveness is less apparent at the provincial level and in federal-provincial collaboration on systemic risk.
  - Modernization is needed to address evolving vulnerabilities (nonbank sectors, fintech, complex interconnectedness) and to develop a comprehensive Canada-wide framework.

### RECOMMENDATIONS FOR MODERNIZING SYSTEMIC RISK OVERSIGHT
- Institutional options:
  - First-best: a single body in charge of systemic risk oversight.
  - Second-best: formalize and strengthen the BOC’s leading role in systemic risk surveillance and create a federal-provincial platform to discuss systemic risk and formulate policy responses.
  - Option for federal-provincial platform: reconstitute the Heads of Agencies Committee (HOA) with defined terms of reference and expanded membership to include all relevant provincial prudential regulators.
  - Over time, review whether systemic risk oversight under HOA leadership with no statutory mandate is adequate.
  - The envisaged Capital Markets Stability Act (consolidating systemic risk responsibilities in capital markets at a single body) could strengthen monitoring and managing systemic risk in capital markets and support macroprudential policy for nonbanks.
- Data, surveillance, and transparency:
  - Develop a more unified approach to data collection to support Canada-wide systemic risk surveillance.
  - Address data gaps, especially cross-sectoral exposures, unregulated nonbank financial intermediation, and funding market activities.
  - Strengthen technical capacity for systemic risk monitoring and analysis.
  - Support the new arrangement with a robust transparency framework and use the Financial System Review to communicate systemic risk surveillance to the public.

### PROGRESS SINCE 2014 FSAP
- 2014 FSAP recommendations included:
  - Provide a clear mandate to an entity to monitor systemic risk to facilitate macroprudential oversight.
  - Enhance cooperation among federal and provincial supervisors.
  - Expand data collection and dissemination to improve coverage, regularity, and availability of time-series data.
  - Augment top-down stress testing framework with risk-sensitive concepts of key credit risk input parameters and econometric, model-based approaches using longer time series.
- Recent improvements:
  - Initiatives to improve data collection in areas such as mortgage origination, nonbank credit intermediation, and housing market.
  - HOA became a more active platform discussing OTC derivatives, mortgage investment corporations, fintech developments, and securities market risks (e.g., high-frequency trading and ETFs).
  - MOUs: BOC signed MOUs with Manitoba, Québec, and Saskatchewan to enhance cooperation on systemic risk surveillance.
  - OSFI and AMF worked closely to introduce a new solvency framework for life insurers.
- Remaining gaps:
  - MOUs do not exist between OSFI and all provincial authorities, limiting information exchange and policy coordination.
  - Regulatory divergences could cause policy leakages (example: OSFI’s B-20 guideline would have risk migration to provincially regulated entities if not voluntarily adopted by AMF and major credit unions).

### MACROPRUDENTIAL POLICY: TOOLKIT, STANCE, AND ISSUES
- Federal macroprudential toolkit and authorities:
  - OSFI: issues prudential guidelines for capital, liquidity, and other requirements for deposit-taking institutions.
  - MoF: can modify mortgage insurance rules that prescribe limits on Canada-wide insured mortgages.
- Recent measures and stance:
  - Revision of OSFI’s B-20 guidelines, with similar measures adopted in Alberta, Québec, and Saskatchewan, improved underwriting standards of uninsured mortgages.
  - OSFI introduced the domestic stability buffer (DSB), essentially a systemic risk buffer to improve resilience of domestic systemically important banks.
- Policy issues and recommended adjustments:
  - Additional measures appear warranted to address:
    - Shift in risky mortgage origination to nonbanks.
    - Vulnerabilities arising from home equity lines of credit (HELOCs).
  - Recommendations:
    - Expand the scope of macroprudential toolkit to address risks from lending by nonbank financial institutions and to limit policy leakages.
    - Develop prudential instruments to deal with emerging risks from HELOCs and other risky mortgage products.
    - Expand the application of cyclical capital requirements to all other deposit-taking institutions.
    - Consider making the Domestic Stability Buffer (DSB) a Pillar 1 requirement (currently Pillar 2) and extend it to other deposit-taking institutions.
  - The financial stability mandate should be further strengthened given MoF’s other objectives (e.g., housing affordability).

### TABLE 1 — CANADA: RECOMMENDATIONS ON SYSTEMIC LIQUIDITY ISSUES (EXTRACT)
- Recommendations (with Priority and Timeframe):
  - 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)
    - Priority: H
    - Timeframe: I
  - Develop a comprehensive systemic risk surveillance framework, supported by a more unified approach to data collection and a strategic plan to address data gaps (BOC lead, HOA)
    - Priority: H
    - Timeframe: I
  - Address data gaps, particularly related to cross-sectoral exposures, unregulated nonbank financial intermediation, and funding market activities (BOC, competent authorities, DOF, provincial governments)
    - Priority: H
    - Timeframe: NT
  - Strengthen further the technical capacity for the systemic risk monitoring and analysis (BOC, competent authorities)
    - Priority: M
    - Timeframe: NT
  - Use the Financial System Review to communicate more effectively systemic risk surveillance to the public (BOC)
    - Priority: M
    - Timeframe: I
  - Expand the scope of macroprudential toolkit to address risks that may originate from lending by nonbank financial institutions and to limit policy leakages (DOF)
    - Priority: M
    - Timeframe: I
  - Develop a set of prudential instruments to deal with emerging risks stemming from home equity lines of credit and other risky mortgage products (DOF, OSFI)
    - Priority: M
    - Timeframe: I
  - Expand the application of the cyclical capital requirements to all other deposit-taking institutions (OSFI, provincial supervisors of deposit-taking institutions)
    - Priority: M
    - Timeframe: I

*Source: EXECUTIVE SUMMARY (Technical Note, Canada FSAP).*

### 6.      The authorities of the federal and participating provincial/territorial jurisdictions have

### 6.      The authorities of the federal and participating provincial/territorial jurisdictions have 

### Overview: CCMRS initiative
- The CCMRS envisages a single Capital Markets Regulatory Authority (CMRA) responsible for:
  - oversight of securities markets in participating provincial/territorial jurisdictions; and
  - systemic risk surveillance and mitigation for Canada-wide securities markets.
- Two major provinces (Alberta and Quebec) have decided not to participate.
- The CCMRS includes three pieces of capital markets legislation:
  - uniform capital markets laws to replace existing securities legislation in participating provinces and territories;
  - complementary federal Capital Markets Stability Act (CMSA) to address systemic risk related to capital markets; and
  - laws that establish the CMRA.
- Seven provinces/territories are currently jointly engaged as participating jurisdictions in the implementation of the CCMRS: British Columbia, Ontario, Saskatchewan, New Brunswick, Nova Scotia, Prince Edward Island, and Yukon.
- The Supreme Court’s ruling in November 2018 removed legal obstacles, and participating jurisdictions are moving forward to complete this initiative.
- Given the current incomplete participation of provinces/territories in the CCMRS, mechanisms to ensure effective cooperation between the envisaged CMRA and provincial securities regulators are necessary.

### Rationale for institutional modernization
- The current systemic risk oversight arrangement has generally worked well but institutional modernization is essential for effective systemic risk oversight going forward because:
  - rapid evolution of the financial system (new exposures and instruments, complex interconnectedness, fintech developments) blurs traditional sector boundaries;
  - significant vulnerabilities are emerging in nonbank financial sectors;
  - prolonged benign macrofinancial conditions may have masked important gaps that could undermine policy responses at times of stress;
  - the Canadian legal framework spreads systemic risk oversight responsibilities over multiple government layers and across sectoral boundaries, preventing a comprehensive Canada-wide framework for systemic risk surveillance and mitigation.

### Identified shortcomings in current arrangements
- Significant data gaps:
  - challenges due to different definitions and/or unresolved overlapping collection (e.g., OTC derivatives);
  - important data not collected at inter-agency boundaries, including cross-sectoral exposures and activities and unregulated nonbank financial intermediation.
- Limited capacity for systemic risk analysis, particularly for:
  - intra-system and cross-border interconnectedness;
  - shadow banking;
  - integrated stress testing (e.g., banks and mortgage insurers);
  - systemically relevant financial institutions (e.g., pension funds) and markets (e.g., securities lending).
- Limited ability to carry out broader and more inclusive macroprudential policy dialogue because multiple federal and provincial agencies are involved in surveillance and control of prudential tools.
- Lack of a single mechanism to monitor and follow up on implementation and outcomes of policies relevant to mitigating systemic risk, especially where federal and provincial coordination is needed.
- Lack of transparency relative to high-transparency standards at individual agency level, weakening accountability and increasing the chance of systemic risk policy failure.

### Preferred reform option and constraints
- The 2014 FSAP recommendation to have an entity responsible for systemic risk oversight remains the preferred reform option.
  - This would require a clear and, preferably, statutory mandate to an entity for systemic risk oversight with participation broad enough to allow a complete view of systemic risk and powers to collect necessary data.
- Authorities indicated implementing a single mandated entity may not be possible at present due to complex constitutional, legal and practical factors.

### Recommended interim improvements (three focus areas)
- Surveillance
  - The BOC should lead systemic risk surveillance in cooperation with relevant authorities.
  - The BOC and all relevant authorities should agree on the framework for systemic risk monitoring and analysis and how data collection should be carried out to support surveillance.
  - Collective efforts are needed to develop a unified approach to data collection and information gathering, supported by adequate legal powers.
  - Data gaps should be identified and addressed on an ongoing basis.
  - The BOC should continue reporting findings to existing inter-agency bodies and formalize its leading role in surveillance.
- Policy discussion
  - Establish a federal-provincial platform to discuss systemic risk issues and formulate policy responses; the HOA could be one option.
  - The HOA’s mandate and structure need modernization, including defining terms of reference and expanding membership to include all relevant provincial prudential regulators.
  - The HOA would serve as a platform to discuss and formulate policies based on technical advice jointly developed by staff of relevant authorities.
  - The BOC, as HOA chair and with systemic risk surveillance responsibility, could facilitate development of policy advice and propose policy options, given its neutral position (with no regulatory authority except over systemically important FMIs).
- Policy implementation
  - Existing competent authorities should remain responsible for implementing policy within their respective mandates and independent statutes.
  - The HOA should have the ability to make recommendations to all relevant authorities on a “comply or explain” basis, or similar arrangements, to balance accountability and autonomy.
- Transparency framework
  - Put in place a robust transparency framework covering mandate, structure, functions, roles of individual agencies, assessment of systemic risk, policy decisions and implementation progress, with confidentiality safeguards for sensitive information.
  - The transparency framework is critical to build trust and establish accountability.

### Completing the CCMRS and transition management
- The CCMRS initiative should be completed to overcome risks from dispersed oversight of securities markets; this should be a priority following the Supreme Court ruling that removed legal obstacles.
- Properly manage transition risks to retain strengths of existing arrangements.
- Given some major provinces may not participate, set up mechanisms to ensure effective cooperation between the envisaged CMRA and provincial securities regulators.
- Over time, authorities should review whether systemic risk oversight under HOA leadership with no statutory mandate is adequate.
  - Potential challenges include: existing competent authorities’ mandates may not fully support policy measures needed to maintain overall financial stability; systemic threats may emerge outside the existing regulatory perimeter.
  - The envisaged CMSA, which would consolidate responsibilities at a single body, can further strengthen monitoring and managing systemic risk in capital markets and support a more complete macroprudential policy framework for nonbanks.

### Systemic risk surveillance architecture and the BOC’s role
- Systemic risk surveillance involves multiple federal and provincial authorities coordinated through several inter-agency arrangements (e.g., SAC, SRAC, HOA, CSA’s Systemic Risk Committee).
- The SRAC, chaired by the BOC, identifies, monitors, and assesses systemic vulnerabilities and emerging risks to the Canadian financial sector.
- The BOC plays a leading role focusing on key macrofinancial vulnerabilities and risks, including household indebtedness, housing market imbalances, bank solvency and liquidity, nonbank financial intermediation, financial markets, and financial system interconnectedness.
- The BOC has developed top-down macro stress tests for banks:
  - Macrofinancial Risk Assessment Framework (MFRAF) analyzing solvency-liquidity spillovers and contagion effects;
  - a more full-fledged solvency module analyzing pre-loss income and credit loss.
- The BOC has conducted top-down stress tests for mutual funds holding corporate bonds.
- The BOC’s Financial System Review (FSR) is the key instrument to communicate financial sector risk assessment to the public.
  - Publication frequency reduced from twice a year to annually.
  - The Financial System Hub (autumn 2018) strengthened surveillance and public access to analytical work.
- The surveillance work extends beyond the BOC’s existing mandate (Bank of Canada Act and Payment Clearing and Settlement Act).

### Surveillance gaps, priorities, and systematic coverage needs
- A more systematic, system-wide surveillance approach is needed to cover sectors including deposit-taking and insurance, where supervisory responsibilities are fragmented.
- Surveillance of securities markets and nonbank financial intermediation has improved since the 2014 FSAP but data gaps persist.
- A unified, systematic approach would help capture risk buildups outside the regulatory perimeter and risk migration across sectors; it would require extra resources for data collection and risk monitoring analysis.
- Key aspects to systematically consider:
  - Risk-taking in financial market activities and nonbank financial institutions: institutional and retail investors (e.g., life insurers, pension funds, and investment funds) taking greater risks in low interest rate environment, contributing to compressed risk premiums; rapid unwinding could amplify market volatility.
  - Overseas exposures and cross-border spillovers: performance of major Canadian banks and globally active Canadian life insurers can be affected by macrofinancial developments in key host countries (e.g., the United States); increases in banks’ external funding, foreign-currency liabilities and use of OTC derivatives are concerns; cross-border spillovers can also occur via holdings of foreign assets by investment funds and pension funds.
  - Intra-system interconnectedness: banks and nonbank financial institutions (particularly pension funds) increasingly linked through repo and OTC derivatives transactions; mortgage financing links (mortgage lenders, mortgage insurers, ultimate investors funding mortgages via market sources) can affect systemic liquidity.
  - Common exposures to housing market and housing finance: banks and nonbank lenders provide a substantial amount of mortgages (Can$1.8 trillion, or around 79 percent of GDP); life insurers and pension funds increased investment in commercial real estate; elevated household debt and housing market imbalances pose substantial vulnerabilities; a sharp housing market correction could have significant, protracted impact on economic growth and create lengthy balance sheet adjustments; the government’s dominant role in backstopping housing finance exposes it to contingent liabilities.

### Progress on data gaps
- Progress made in closing some data gaps in mortgage origination, nonbank credit intermediation, and the housing market:
  - Loan-level origination data collected by OSFI and shared with the BOC for D-SIBs since 2013, and for the rest of the federally regulated financial institutions with large residential mortgage exposures since 2015.
  - In March 2018, CMHC started to collect detailed data on Approved Issuers’ uninsured lending activities to inform federal agencies’ risk analysis.
- Remaining data infrastructure needs:
  - A national credit registry covering credit provided by banks, credit unions, or any other financial institutions would facilitate a system-wide view of household indebtedness and credit risks.
  - A national property and land transaction registry would allow identification of non-first-time buyers, speculators, corporate buyers, and facilitate targeted macroprudential policies.

*Source: Excerpt from the provided IMF Canada FSAP content.*

### 19.      Continued efforts to address data gaps would help gather a more complete picture of

### 19.      Continued efforts to address data gaps would help gather a more complete picture of 

### Data gaps and risk monitoring
- Key data gaps: cross-sectoral exposures, unregulated nonbank financial intermediation, and funding market activities.
- Existing data collections do not cover the entire system; examples:
  - Comprehensive data on bond and repo transactions are necessary to complement the existing collection by IIROC which only covers government securities dealers.
  - Information on asset holdings of unregulated nonbank financial intermediaries (mortgage finance companies, mortgage investment companies, hedge funds, private equity funds, nonbank broker dealers) would improve monitoring of risk-taking.
- Other areas for improved data collection: OTC derivative markets, securities lending, and cross-border investment activities and exposures.
- Recommendation: Conduct a comprehensive assessment of data gaps and swiftly address existing gaps to support a comprehensive assessment of systemic risk.
- Note: See Appendix III for a summary on key data gaps.

### Nonbank financial intermediation and pension funds
- Given growing systemic relevance of nonbank financial intermediation, strengthening oversight of large public pension funds would be helpful.
- Suggested improvements for large pension funds:
  - Increase the detail, standardization, and reporting frequency of financial disclosures.
  - Introduce standardized liquidity stress testing requirements to improve risk monitoring and assessment.
- Policy objective: Determine whether risks are shifting to nonbank financial intermediaries and whether valuation of some asset classes is diverging from fundamental values, potentially giving rise to asset bubbles.

### Bank of Canada (BOC) role in systemic risk surveillance
- Recommendation: Formalize a clear mandate for the BOC’s role in systemic risk surveillance for the entire financial system to support BOC access to necessary data.
- Rationale:
  - Canada-wide surveillance is currently missing and would enhance risk monitoring and identification, including nonbank financial intermediation (insurance, pension) and other market-based financing.
  - A clear mandate would allow development of a comprehensive Canada-wide framework for systemic risk surveillance and data collection.

### Macroprudential toolkit: remit and authorities
- Federal remit covers a significant share of the financial system; responsibilities and authorities:
  - OSFI: authority over bank capital and liquidity requirements, systemic risk buffers, D-SIB capital surcharge, other prudential tools for federally regulated financial institutions.
  - MoF (DOF advises MoF): can set mortgage insurance rules within the government-backed mortgage insurance arrangement.
  - CMHC (with MoF approval): can adjust mortgage insurance premiums and guarantee fees for National Housing Act mortgage-backed securities and Canada Mortgage Bond.
  - Provincial governments: can set property-related taxes (e.g., for housing affordability) and control prudential tools for provincially regulated financial institutions; they can designate D-SIFIs in their jurisdictions.
- Policy coordination: typically at the SAC at the federal level; better coordination with provincial authorities is warranted.
- Policy leakage: some federal measures (particularly by OSFI) are not applied to provincially regulated entities, causing leakages.

### Key macroprudential measures and calibrations
- OSFI powers and measures:
  - D-SIB capital surcharge introduced March 2013 (effective January 2016) equivalent to 1 percent of risk-weighted assets applied to six D-SIBs.
  - Domestic stability buffer (DSB) announced June 2018 as a Pillar 2 requirement to cover systemic vulnerabilities.
  - Leverage ratio requirement implemented November 2014, consistent with Basel III.
  - Foreign-currency liquidity: tool to monitor liquidity coverage ratios (LCRs) by significant currencies.
- DSB calibration and timeline:
  - December 2018: OSFI raised the DSB for all six D-SIBs by 25 basis points to 1.75 percent of total risk-weighted assets (all exposures, including those overseas), effective April 2019.
  - June 2019: DSB raised to 2 percent, which will come in effect in October 2019.
- Countercyclical capital buffer (CCyB):
  - Framework elements: OSFI assesses excessive credit growth in consultation with SAC; CCyB for exposures in Canada can be set between 0 and 2.5 percent of risk-weighted assets; CCyB must be met with common equity tier-1 capital and noncompliance leads to dividend restrictions.
  - Operational status: CCyB for exposures in Canada has so far been at zero.
- B-20 Guideline revisions (OSFI, 2018):
  - Extended stress-testing requirement to uninsured mortgage borrowers accessing fixed-rate loans with low LTV and maturity beyond 5 years.
  - All borrowers subject to B-20 must be able to service obligations if their interest rates increase by 2 percentage points or reach the level of the BOC’s 5-year fixed posted mortgage rate (whichever is higher).
  - Lenders required to enhance LTV measurement and limits to reflect current risk environment.
  - B-20 Guideline (2012) included a maximum LTV of 65 percent for non-conforming loans and restrictions on co-lending that breaches LTV limits.
- MoF mortgage insurance rules and changes:
  - MoF controls rules backstopped by the government; CMHC provides mortgage insurance and government backs two private insurers (subject to a 10 percent deductible).
  - Mortgage insurance rules include LTV cap, amortization period limits, maximum property value, minimum credit score, and stress test qualifying rate for insured mortgages.
  - HELOCs are ineligible for mortgage insurance.
  - December 2015 (effective February 2016): minimum down payment increased from 5 to 10 percent on the portion of house value exceeding $500,000 (the 5 percent down payment for properties up to $500,000 remained unchanged).
  - October 2016: stress-testing requirement to assess debt servicing capacity of insured mortgage borrowers introduced.
  - November 2016: rules for high-ratio mortgages extended to portfolio insurance of low-ratio mortgages.
  - Amortization period limit remains at 25 years (set in 2012).
- Additional housing finance-related measures (selected):
  - CMHC increased insurance premium for borrowers with down payments between 5 and 25 percent, effective March 2017.
  - CMHC introduced a 0.01 percent administration fee assessed against a portion of an issuer’s unused NHA MBS guarantee allocations beyond a specified threshold in April 2017.
  - Provincial measures include foreign buyers stamp duties and vacant home taxes (some considered capital flows management measures).

### Tabled macroprudential measure highlights (2016–2019)
- February 2016 DOF: minimum down payment increased from 5 to 10 percent for portion above Can$500,000 (5 percent remained for up to Can$500,000).
- October 2016 DOF: requirement to stress-test debt-servicing capacity extended to all high-LTV insured mortgage borrowers.
- November 2016 DOF: eligibility requirements for low-LTV mortgage insurance aligned with high-LTV, restricting certain mortgages (e.g., cash-out refinance, amortization above 25 years, investment properties).
- January 2018 OSFI: B-20 Guideline revised to require stress-testing of uninsured mortgage borrowers and disallow arranging mortgages to circumvent LTV limits.
- July 2018 OSFI: DSB at 1.5 percent of risk-weighted assets formally introduced.
- April 2019 OSFI: DSB increased to 1.75 percent of risk-weighted assets.
- October 2019 OSFI: DSB increased to 2 percent of risk-weighted assets.

### Macroprudential policy stance and effectiveness
- Recent developments:
  - Credit growth moderated in the past year in line with softening housing market due to monetary policy tightening and prudential measures.
  - As of 2019Q1, credit growth moderated to 4.8 percent year-on-year.
  - Long credit upcycle had led to a large, sustained credit-to-GDP gap, rapidly rising house prices in major cities (Toronto and Vancouver), and localized construction booms; household debt remained high.
  - Indicators since have moderated: insured mortgage lending reduced, credit quality improved (share of banks’ new lending to highly indebted borrowers fell sharply), house prices broadly stable, construction/inventory/sales/mortgage lending no longer indicate overheating.
  - Credit-to-GDP gap has narrowed, and household debt-to-gross disposable income has stabilized.
- Assessment:
  - Current macroprudential stance broadly adequate given declining macrofinancial vulnerabilities.
  - Revision of OSFI’s B-20 guidelines (came in effect January 2018) and similar measures in Alberta, Saskatchewan, Québec appear to have improved underwriting standards of uninsured mortgages.
  - The overall macroprudential stance remains relatively tight, including six rounds of tightening mortgage insurance rules by the DOF (last around end-2016).
- Evidence on effectiveness:
  - IMF (2017) finds compelling evidence that three of the six rounds of tightening between 2008 and 2016 on mortgage insurance rules were effective in reducing mortgage credit growth.
  - BOC analytical note: fewer low-ratio mortgages originated to highly indebted borrowers in 2018 compared to previous year; distribution of new borrowers moderately improved; overall mortgage activity significantly slowed (revision of B-20 coincided with a substantial increase in interest rates).
  - Microsimulation and Survey of Financial Security: mortgage demand of first-time buyers more sensitive to LTV limits than policies targeting debt service ratio (Allen et al., 2016).

### Policy issues and recommendations
- Expand macroprudential toolkit coverage:
  - Current toolkit should be expanded to address risks associated with household lending by nonbank financial institutions.
  - Tightening of macroprudential measures has led to a shift in risky mortgage origination to nonbank financial institutions.
  - Growth of financial intermediation outside traditional banking is a shared concern.
- Scope of measures:
  - Extend macroprudential measures to cover all mortgage lending irrespective of lender (including provincially regulated lenders and unregulated nonbank lenders) to address policy leakages.
- Monitoring and calibration:
  - Carefully monitor risks originating from nonbank financial intermediation; policy leakages currently limited by non-scalable funding of nonbank institutions, but should be addressed preemptively.

*Source: Excerpt from IMF Canada financial sector assessment chapter provided in the content unit.*

### 35.      International experience suggests that macroprudential tools could suffer from policy

### 35.      International experience suggests that macroprudential tools could suffer from policy leakages

### Macroprudential effectiveness and policy leakages
- Tightening LTV limits has economically significant effects on household credit and a milder, dampening side effect on private consumption.
- When LTV limits are already tight at the onset, additional tightening:
  - Diminished effects on credit.
  - Strengthened effects on consumption (Alam et al. 2019).
- Policy leakages can occur as credit shifts to financial intermediaries outside the regulatory perimeter.

Policy recommendations to address leakages:
- Extend the regulatory perimeter to nonbank financial intermediaries or foreign-owned providers of financial services.
- Engage in reciprocity agreements with other jurisdictions to extend the scope of application of macroprudential policies to foreign-owned financial intermediaries (IMF-BIS-FSB 2016).

### Risks and policy for HELOCs (home equity lines of credit)
- Significant undrawn exposures related to HELOCs on bank balance sheets could bear systemic importance in crisis times.
- FCAC survey-based study identified four potential issues with HELOC borrowers: overborrowing, debt persistence, wealth erosion and uninformed decision-making.
- Survey statistics:
  - "Less than 15 percent of respondents were aware that the bank can increase a HELOC’s interest rate at its discretion."
  - "More than 60 percent of the HELOC holders did not know that the lender can require the borrower to repay a HELOC at any time."
  - "A quarter of the borrowers would struggle if their HELOC payments would increase by 100 Canadian dollars or less."
  - "In the case of federally regulated financial institutions, two out of five outstanding loans secured with real estate assets are HELOC-type loans."
- Historical concern: similar complex mortgage products were heavily criticized as one of the main culprits of the global financial crisis (see Amromin et al. 2018).

Macroprudential measures suggested for HELOCs:
- Consider policies to limit systemic risk from HELOCs, including:
  - Limiting access to HELOCs to borrowers with a total debt-to-income ratio below a certain threshold (example threshold cited: below 300 percent).
  - Calibrating thresholds based on the distribution of household indebtedness and associated risks.
- Note: "At the moment, HELOCs cannot be (mortgage) insured. In addition, the maximum amount of HELOC has been capped by the LTV limit at 65 percent."

Supporting evidence:
- Using micro-level data from Europe, households with total debt exceeding 300 percent of their disposable income are found to be more vulnerable to income shocks and to reduce consumption more than less constrained borrowers (Alter, Feng, and Valckx 2018).

### Cyclical capital buffers and application across institutions
Findings:
- Other federally regulated non-D-SIBs and provincially-regulated deposit-taking institutions are similarly exposed to systemic risk from high household indebtedness and housing market imbalances.

Recommendations:
- Apply cyclical capital buffer measures to all deposit-taking institutions, including large credit unions and mid-sized banks.
- Options:
  - Make the DSB a Pillar 1 requirement.
  - If DSB Pillar 1 is outside scope, activate the CCyB at an appropriate level for all regulated deposit-taking institutions.
- Expected benefits: improved transparency and strengthened capital requirement framework.

Context on Pillar buffers:
- "While the DSB is a Pillar 2 buffer, the CCyB along with D-SIB surcharge and capital conservation buffer are Pillar 1 buffers, breaches to which would entail automatic constraints on dividend distribution."
- Several jurisdictions, including Sweden, Switzerland and the United Kingdom, have recently activated or tightened the CCyB at a non-zero level (see also IMF 2019).

### Regional heterogeneity and differentiated macroprudential policies
- House price-at-risk analysis shows significant variability in downside risks across cities (see Appendix V).
- Recommendation: consider heterogeneity of household indebtedness and housing market imbalances across regions when designing macroprudential policies.
- Examples of differentiated tools:
  - Vary LTV limits or debt service criteria across regions.
  - Impose tighter debt service stress tests in regions with more severe downside house-price risks.
  - Tighter borrowing limits for homeowners with multiple properties (speculative investments).
- International precedent: regional differentiation implemented in Norway and South Korea.

### Bank of Canada / Financial system monitoring — key risk indicators and data
- Vulnerabilities Barometer composed mostly of several credit variables (thresholds in Appendix 1 of the paper).
- Banks’ solvency risk from household sector monitored through exposures and credit quality; estimated default rates from Household Risk Assessment Model; impact assessed with top-down solvency assessment (TDSA) and MFRAF.
- Banks’ solvency risk from corporate sector monitored using "Corporate PD" model, then assessed with TDSA and MFRAF.
- Banks’ solvency risk from sovereign assessed through exposures, credit quality, and OSFI-BOC biennial macro stress tests.
- Interbank (D-SIBs) interconnectedness analyzed using centrality measures applied to interbank regulatory data; market-based indicators used to gauge market assessment of bank stability.
- Banks’ liquidity risk assessed through liquidity metrics, funding mix, access to funding markets, and MFRAF stress scenarios.
- Risks from disruptions in financial market infrastructures monitored via operational and financial risk indicators and system designation criteria.
- Nonbank financial institutions (insurers, investment funds, pension funds) monitored via capital adequacy, leverage, liquidity, net flows, cash and liquidity ratios, and sectoral solvency estimates.

### Financial system structure and key quantitative statistics (Appendix II highlights)
- As of end-2018:
  - Total assets of financial institutions: US$10.2 trillion or 626 percent of GDP.
  - Outstanding debt securities: US$2.2 trillion (133 percent of GDP).
  - Stock market capitalization: US$1.9 trillion (119 percent of GDP).
- Composition of financial institutions’ total assets (approximate shares):
  - Deposit-taking institutions: 45 percent.
  - Pension funds: 18 percent.
  - Mutual funds: 17 percent.
  - Insurers: 13 percent.
- System growth and internationalization:
  - Total assets of financial institutions increased by 31 percent (since end-2013).
  - Banking sector claims on nonresidents increased to 41 percent of banking sector assets (from 31 percent).
  - Mutual funds and pension funds expanded cross-border investment, driving international portfolio investment assets to 95 percent of GDP (from 60 percent).
- Market and concentration features:
  - Banks finance about two-thirds of private sector credit.
  - 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.
- Funding and markets:
  - Foreign-currency debt securities increased from 26 percent to 34 percent.
  - Bond markets expanded by about 39 percent since end-2013.
- Housing finance and government role:
  - Government provides mortgage insurance through CMHC and backstops private insurers’ mortgage insurance (subject to a 10 percent deductible).
  - CMHC provides a timely payment guarantee for securitization of qualifying insured mortgages.
  - As of 2018Q3, insured mortgages amounted to Can$723 billion and government-guaranteed MBS (NHA MBS) amounted to Can$485 billion.

### Data gaps for systemic risk surveillance (Appendix III highlights)
High-priority data needs:
- Repurchase agreements: transactions beyond what IIROC tracks; data on collateral reuse and tri-party repo. (Priority: High)
- National view of derivatives (OTC and exchange): national repository of Trade Repository data and granular central counterparty data. (Priority: High)
- System-wide view of household indebtedness and credit risks: national credit registry with loan terms, borrower characteristics, lender identifier. (Priority: High)
- National property and land transaction registry: harmonized transaction-level data across provinces to identify non-first-time buyers, speculators, corporate buyers. (Priority: High)
- Cross-border and cross-sector exposure data: overseas credit and derivatives exposures; exposures between banks and nonbank financial intermediaries over time. (Priority: High)

Medium- and low-priority gaps include additional securities markets data, securities lending, benchmark information, holdings and positions, and more comprehensive nonbank financial institution coverage.

*Source: IMF Staff and Canadian Authorities (chapter text and Appendices from the provided IMF PDF).*

### Appendix IV. Government-b acked Mortgage Insurance Rules

### Appendix IV. Government-backed Mortgage Insurance Rules

### Government-backed mortgage insurance rules (2019)
- Amortization period limit: 25 years
- Minimum down payment for new mortgages: 5 percent for the first $500,000 and  
  10 percent for the portion above $500,000
- Refinancing mortgages: Non-insurable
- High-ratio investment properties: Non-insurable in high-ratio
- Low-ratio investment properties: Single-units non-insurable; 2–4 units are insurable with LTV ≤ 80 percent
- Debt-service ratio limits:
  - Gross-debt-service (GDS): 39 percent
  - Total-debt-service (TDS): 44 percent
- Stress test qualifying rate for insured mortgages: Greater of: (i) the contractual mortgage rate, or (ii) the Bank of Canada 5-year fixed posted rate
- Maximum property value to qualify for insurance: $1,000,000
- Credit score: ≥ 600, with a 3 percent exception bucket

### Revision of government-backed insurance rules (2016)
- (1) Loan-to-value (LTV) limit for new mortgages was tightened from 95 to 90 percent on the portion of the house price more than $500,000 (effective February 15, 2016).
- (2.a) Debt service criteria were expanded to all borrowers who have to qualify under maximum debt-servicing standards based on the higher of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted mortgage rate (effective 17 October 2016).
- (2.b) Rules for high-ratio mortgages were extended to portfolio insurance of low-ratio mortgages (effective November 30, 2016).

### Revision of OSFI B-20 guideline (2018)
- (1) “Stress test” for uninsured mortgages: greater of: (i) the contractual mortgage rate +2 percent, or (ii) the Bank of Canada 5-year fixed posted rate
- (2) OSFI requires lenders to enhance their loan-to-value (LTV) measurement and limits so that they will be dynamic, reflective of risk, and are updated as housing markets and the economic environment evolve
- (3) OSFI is placing restrictions on certain lending arrangements that are designed, or appear designed to circumvent LTV limits (i.e., no “co-lending”)

*Source: Department of Finance; OSFI; IMF Staff.*

### Appendix V. Household Indebtedness and Housing Market Imbalances

### Summary assessment of vulnerabilities
- Macrofinancial vulnerabilities—elevated household indebtedness and housing market imbalances—remain substantial and pose financial stability concerns.
- Drivers: decades-long credit upcycle, low interest rates, low capital charges for mortgage lending, and policies promoting housing affordability; these factors fueled borrowing amid rapidly rising house prices.
- Potential amplification mechanisms: borrowers’ refinancing pressures and lenders’ sudden adoption of risk-based mortgage pricing could amplify procyclical effects of falling house prices.
- Distributional effect in severe downturns: household sector would be affected, with a significant increase in debt belonging to financially weak households; the corporate sector would remain more robust.

### Recent developments and tail risks
- Credit growth moderated to 4.8 percent year-on-year as of 2019Q1.
- Several rounds of policy measures have:
  - Reduced insured mortgage lending.
  - Improved credit quality.
  - Sharply reduced the share of banks’ new lending to highly indebted borrowers.
- Growth-at-risk (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.

### Household balance-sheet metrics and housing valuations
- Household debt: reached 96 percent of GDP at end-2018.
- Household net wealth: 489 percent of GDP.
- House price trends: Canada-wide house prices increased by more than 20 percent in real terms over the past decade.
- House price-at-risk (medium term): Based on current macrofinancial conditions, with 5 percent probability average real house price could fall by at least 12 percent year-on-year over the next three years.
- House price overvaluation relative to fundamentals (income or rent) is a main driver of imbalances and downside risk.

### Regional heterogeneity and distributional concerns
- British Columbia and Ontario:
  - Face more heightened financial stability risks given larger household debt-at-risk and greater downside risk to house prices.
  - Household debt relative to income is higher in these provinces.
  - Share of debt belonging to financially weak households is higher and would increase by a larger magnitude in an adverse scenario.
- Major-city valuations:
  - Toronto and Vancouver metro areas are overvalued based on house price-to-income indicators.
  - Cities where house price-to-income is most misaligned face larger downside risk to house prices.
- House price-at-risk regional estimates:
  - The 5-percent house price-at-risk measures a potential decline in real house prices (year-on-year) three years ahead with a 5 percent probability.

### Role of capital flows
- Foreign direct investment (FDI): typically long-term investment; associated with lower future risks to several Canadian regional housing markets.
- Other capital inflows (non-FDI or portfolio flows): typically attributed to foreign bank transactions; found to amplify downside risks to house prices in cities such as Toronto, Vancouver, and Calgary.

### Key graphical and analytical findings (figure captions and metrics)
- Household Indebtedness and Wealth, 2008-18:
  - Financial wealth, net; Nonfinancial wealth; Total liabilities; Borrowing and net accounts payable shown in percent of GDP.
- Household Indebtedness and Debt Servicing, 2018Q2:
  - Cross-country comparison shows Canada among highest in Debt to GDP and elevated debt servicing-to-income.
- Debt of Financially Weak Households, 1999-2017:
  - Financially weak households defined as households whose debt servicing-to-income is above 40 percent; debt of these households considered at risk.
- Housing Market Related Vulnerabilities By Regions:
  - Metrics include share of banks' residential mortgage lending, 5-percent house price-at-risk (3-years ahead), share of household debt-at-risk (2016), and additional increase in the adverse scenario (2020).
- House Price-to-Income in Major Canadian Cities, 2000-18:
  - Indexed to 1999-2018 average=100; shows substantial divergence for Toronto and Vancouver.
- Driving Factors of House Price-at-Risk, 1982-2018:
  - House price valuation and financial conditions are principal drivers; other factors contribute as well.
- Downside Risks to House Prices in the Medium Term (1982-2018):
  - Historical evidence of sizeable medium-term downside risk captured by house price-at-risk measures.
- Capital Flows as Drivers of Downside Risks to House Prices:
  - Coefficients at 10th-percentile, one-year ahead, show differential impacts of FDI vs. other investment flows across cities.

*Source: IMF Staff; Department of Finance; OSFI; CMHC; Haver Analytics; OECD; Statistics Canada, Survey of Financial Security.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1canea2020004.pdf_