## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2025/english/1canea2025001-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1canea2025001-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1canea2025001-source-pdf.pdf.json) --- ### Background and recent macroeconomic developments - Canada achieved a soft landing after sharp monetary tightening, but faces large geopolitical uncertainties and slow growth. - Policy rates were cut in June 2024 and were "225 basis points below earlier peaks, reaching 2.75 percent in March 2025." - Headline inflation eased to "2.3 percent in March 2025." - Real per capita GDP growth averaged "1½ percent during 2023–24." ### Financial system resilience and key vulnerabilities - System-wide resilience - Large financial system remained stable through sizable swings in output, inflation, and interest rates. - Capital and liquidity buffers comfortably exceed regulatory minima. - Banking sector - Credit performance is robust; nonperforming loans are low (NPLs 0.6 percent as of December 2024). - Common Equity Tier 1 (CET1) ratio is 13 percent; liquidity coverage ratios (LCR) for the six D-SIBs are over 125 percent. - Significant exposures to residential mortgages create vulnerability to interest rate resets amid high household debt. - Nonbank Financial Institutions (NBFIs) - NBFI sector accounts for about 65 percent of financial system assets. - Rising leverage in NBFIs and interconnected funding markets increase systemic risks. - Other vulnerabilities - Downside risks: slow growth, trade tariffs, geoeconomic fragmentation. - Climate change and cybersecurity threats present material risks. ### Stress testing and scenario analysis — design and outcomes - Scenario design - Baseline: consistent with October 2024 WEO projections. - Adverse: deepening geoeconomic fragmentation, protectionism, severe supply shock, initial inflation spike, central bank pausing or reversing rate cuts, sharp corrections in housing and equity valuations. - Adverse scenario cumulative contraction: "4.8 percent in real GDP in the first two years," representing a "2.7 standard deviation shock." - Banking solvency stress test (seven systemic DTIs, 3-year horizon 2025–27) - Under the Baseline: aggregate CET1 rises to 15.7 percent by 2027 from 13.7 percent in 2024. - Under the Adverse: CET1 ratio declines by 2.3 percentage points at the trough but remains above regulatory minimums; individually, all DTIs remain well above regulatory thresholds. - Sensitivities: - Market risk: additional CET1 decline of 1.1 percentage points relative to main adverse scenario. - Higher PDs for manufacturing and commodity sectors: additional CET1 drop of 40 basis points. - More conservative PDs across all portfolios: additional CET1 drop of 1.7 percentage points. - In all sensitivities, institutions remain above regulatory thresholds. - Banking liquidity tests - LCR-based tests across 12 scenarios: aggregate LCR remains above 100 percent under individual retail scenarios; under wholesale and combined scenarios aggregate LCR falls somewhat below 100 percent. - Cash flow analysis (20 scenarios): over a three-month horizon the seven systemic DTIs can withstand liquidity shocks in most scenarios; shortfalls occur only in the three most aggressive scenarios. Under the most aggressive scenario aggregate shortfalls represent 12 percent of the initial counterbalancing capacity. - Insurance and pension stress tests - Life insurers (median solvency ratio): initial improvement from 136 to 168 percent, then decline to 142 percent in year 2 and 121 percent in year 3; no life insurer falls below regulatory threshold. - P&C insurers (median solvency ratio): falls from 259 to 222 percent in year 1, then to 218 percent, recovering to 237 percent in year 3. - Pension funding (adverse three-year scenario): median large public sector plans funding ratios fall by 13 percentage points in year 2; private sector plans fall by 16 percentage points in year 2; over a quarter of plans would experience a funding deficit in the third year. - Margin and collateral calls: about CAD 32 billion total in the tested scenario, mostly due within t+1; life insurers and pension plans able to source required liquidity. ### Household and corporate vulnerability analyses - Household (mortgages) - Mortgages represent over 70 percent of household liabilities. - Home prices surged nearly 60 percent during 2020–22, corrected by about 15 percent in late 2022. - 80 percent of total mortgage loans are fixed-rate; 20 percent are variable-rate (75 percent of which have fixed payments). - As of December 2024, approximately 60 percent of mortgages will renew by 2026 at likely higher rates. - Mortgage delinquency rate: 0.2 percent as of December 2024. - Under the adverse scenario, mortgage PDs increase to 0.9 percent for uninsured loans and 1.4 percent for insured loans. - Corporate - Under the Baseline, corporate PDs remain stable at 0.5 percent in early 2025 and gradually decline. - Under the Adverse, corporate PDs rise to 1.3 percent by late 2027. - Sectors with sharper PD increases: mining, quarrying, oil, construction and real estate. ### Climate risk analysis — physical and transition channels - Physical risk (wildfires) - A significant portion of mortgage loans is located in areas with very high to extreme fire-weather; this portion increases under RCP4.5 and RCP8.5 scenarios. - Findings sensitive to assumptions on P&C insurance coverage and damage functions; loans with high LTV are more sensitive; Saskatchewan and Manitoba see larger LGD increases. - Transition risk - IMF-ENV model used to project sectoral impacts to 2040 under Current Policies, Net-Zero 2050 (orderly), and Delayed Transition (disorderly). - Sectoral PDs and LGDs increase modestly with notable adverse impacts in oil and gas. - DTIs’ credit losses estimated to increase between 3.8–7.1 percent under Net Zero 2050 and Delayed Transition scenarios relative to current policies by 2040. - Interpretation caveats: climate risk analysis is emerging, subject to model and data constraints, focuses on direct credit-risk channel and may underestimate broader systemic impacts. ### Financial sector oversight — assessment and institutional gaps - Strengths - Overall framework robust; Canada at the forefront of implementing Basel III. - SRSC creation improved coordination on systemic risk monitoring. - Identified gaps - Strengthen operational independence and budgetary autonomy of federal and some provincial supervisors. - Enshrine supervisors’ mandates for safety and soundness and contribution to financial stability as primary legislative objectives. - Improve federal-provincial cooperation and information sharing; address NBFI data gaps. - A formal macroprudential policy decision-making mechanism is lacking; SRSC not a policy decision body. - DSB releasable nature is useful; recommendation to apply DSB to all systemically important DTIs and consider a positive-neutral CCyB for other DTIs. ### Supervision and regulatory enhancements (selected) - Banking supervision - Increase frequency and depth of onsite reviews; cover banks’ internal risk models more deeply. - Align country and transfer risk and related-party frameworks with Basel Core Principles (BCP). - Ensure supervisory resources keep pace with evolving risks. - NBFI oversight - Strengthen federal-provincial cooperation and insurance group supervision. - For pensions: engage more closely with large public sector plans; bolster governance and internal controls oversight; require more frequent granular reporting. - Securities supervision: harmonize provincial rules further; enhance stress testing; improve custodian oversight; align liquidity risk frameworks with FSB and IOSCO guidance. - Cyber resilience - Develop a joint cyber strategy for the financial sector and a process to manage systemic cyber incidents. - AML/CFT - Make supervision more risk-driven, proactive, intrusive for high-risk entities; align resources with risk levels. - Strengthen sanctioning powers and deepen understanding of cross-border ML/TF risks. - FINTRAC is sole AML/CFT supervisor since 2021; penalties currently too low; government announced intent to increase administrative monetary penalties in 2024 Fall Economic Statement. ### Crisis preparedness and financial safety nets - Resolution frameworks - Resolution framework for banks and nonbank DTIs is mature; new cooperation and indemnity mechanisms established. - Authorities should complete pending resolution framework for insurance companies. - Review of federal deposit insurance coverage ongoing; consider harmonizing coverage levels and strengthening resolution authority independence. - Systemic liquidity management and foreign funding - High reliance on U.S. funding markets necessitates close monitoring of foreign funding risks and review of hedging practices, notably for NBFIs. - Strengthen infrastructure for core Canadian funding markets and enhance data collection. - Bank of Canada should clarify Emergency Liquidity Assistance (ELA) policy and adjust minimum pricing; consider identifying regulated systemic NBFIs and granting them access to bilateral liquidity support under strict safeguards to mitigate moral hazard. ### Key recommendations (selected highlights and timing) - Systemic risk monitoring, analysis, coordination - Enhance coordination on stress testing methodologies and results (BOC, OSFI, and AMF) — ST - Continue to closely monitor mortgage refinancing risks and enhance RESL data coverage and quality (BOC, OSFI, and AMF) — ST - Expand reporting and monitor LCR for all large pension plans (OSFI, FSRA, FA, PA) — ST - Strengthen data sharing and standardize climate data and risk frameworks across provinces (OSFI, AMF, FA, PA) — MT - Financial oversight - Provide OSFI, AMF, FSRA with explicit mandates listing safety and soundness and contribution to financial stability as primary objectives (Federal, Provincial DOF) — ST - Strengthen budgetary autonomy of OSFI, AMF, and FSRA (Federal and Provincial DOF) — ST - Remove barriers to confidential information exchange and strengthen federal-provincial supervisory cooperation (DOF, OSFI, PA, AMF, FSRA) — ST - Macroprudential policy - Establish a mechanism for taking action on systemic risks (BOC, other FA and PA) — ST - Extend the Domestic Stability Buffer to all domestically important DTIs and establish a positive neutral CCyB for remaining DTIs (OSFI, AMF, other PA) — ST - Regulation and supervision of banks and nonbank DTIs - Increase bank supervision intrusiveness through more frequent and deeper reviews (OSFI) — I - Align related-party framework with international standards (FA, PA, OSFI, AMF, FSRA) — ST - Insurance and pension oversight - Implement consolidated supervision for insurance groups (DOF–Federal and Québec) — ST - Enhance governance and internal controls supervision at large pension plans (FSRA, OSFI) — ST - Strengthen authorities’ powers to obtain confidential information from pension plans (FA, PA) — ST - Investment funds and custodians - Align liquidity framework with FSB-IOSCO guidance and strengthen stress-testing; strengthen oversight of custodians (CSA) — MT - Cyber resilience and AML/CFT - Increase legal/regulatory powers over third-party providers and set up process to manage systemic cyber incidents (DOF, OSFI, BOC, PA; FA/PA) — MT / I - Deepen understanding of cross-border ML/TF risks and ensure effective risk-based supervision with stronger sanctions (DOF, FINTRAC, OSFI) — I - Crisis preparedness - Harmonize federal-provincial deposit insurance schemes and update coverage (FA, PA) — MT - Establish resolution framework for insurers (DOF, OSFI, PA) — MT - Strengthen domestic funding markets and monitor foreign funding risks; raise ELA minimum rate and grant systemic NBFIs access to bilateral liquidity support (FA, PA, BOC) — ST ### Major macrofinancial scenario outcomes and key numerical shocks (selected) - Adverse scenario illustrative outcomes: - GDP cumulative contraction: "4.8 percent in the first two years" (cited above). - Unemployment increases to "9.6 percent." - Inflation increases moderately, "by about 1pp...." - Short-term rates increase "60 bps—driven by high inflation expectations...." - Exchange rate depreciates "by about 10 percent." - Asset price shocks: - Stock prices fall "by 33 percent..." - House prices drop "by 25 percent." - Nominal wage declines "0.5 percent...." - Oil prices slump "by 33 percent." ### Key macroeconomic and financial statistics (selected) - Nominal GDP (2023): Can$ 2,892 billion (US$ 2,142 billion) - GDP per capita (2023): US$ 53,607 - Population (2023): 40.0 million - Real GDP (annual, Est./Proj.): 2023 1.5 | 2024 1.5 | 2025 1.4 | 2026 1.6 | 2027 1.7 - Unemployment rate (average): 2024 6.4 | 2025 6.6 | 2026 6.5 | 2027 6.3 - CPI inflation (average): 2024 2.4 | 2025 2.0 | 2026 2.1 | 2027 2.0 - Household credit growth (annual average): 2024 3.6 | 2025 3.5 | 2026 3.5 - Financial system size: total assets of financial institutions reached 756 percent of GDP in 2024, increasing by 43.3 percent since 2019. - Banking sector concentration: six largest banks account for 94 percent of banking sector assets; including Québec cooperative credit entity, seven entities hold over 90 percent of DTIs' assets. - Mortgage characteristics and risks: - Mortgage delinquency: 0.2 percent as of December 2024. - Share of mortgage loans fixed-rate: 80 percent; variable-rate: 20 percent (75 percent of variable-rate loans have fixed payments). ### Implementation status — selected 2019 FSAP recommendations - Partially implemented items include raising required capital for mortgage exposures; policy framework for housing downturn; systemic risk surveillance improvements; strengthened oversight of large public pension funds. - Not implemented or incomplete items include strengthening autonomy and governance of authorities; Cooperative Capital Markets Regulatory System; some MOUs between federal and major provincial supervisors. *Source: EXECUTIVE SUMMARY and chapter excerpts (Canada) — IMF Financial Sector Assessment content unit from the provided PDF.* ### EXECUTIVE SUMMARY __________________________________________________________________________ 7 ### EXECUTIVE SUMMARY ### Background and Recent Macroeconomic Developments - Canada achieved a soft landing after sharp monetary tightening, but faces large geopolitical uncertainties and slow growth. - Policy rates were cut in June 2024 and were "225 basis points below earlier peaks, reaching 2.75 percent in March 2025." - Headline inflation eased to "2.3 percent in March 2025." - Real per capita GDP growth averaged "1½ percent during 2023–24," reflecting slow underlying productivity growth. ### Financial System Resilience and Key Vulnerabilities - Canada's large financial system remained stable through sizable swings in output, inflation, and interest rates. - Banks: - Credit performance is robust; nonperforming loans are low. - Capital and liquidity buffers comfortably exceed regulatory minima. - Significant exposures to residential mortgages create vulnerability to interest rate resets amid high household debt. - Nonbank Financial Institutions (NBFIs): - Insurance, pensions, and investment fund sectors have generally weathered shocks. - Rising leverage in NBFIs and interconnected funding markets increase systemic risks. - Other vulnerabilities: - Downside risks include slow growth, trade tariffs, and geoeconomic fragmentation. - Climate change and evolving cybersecurity threats present material risks. ### Stress Testing and Scenario Analysis - Adverse scenario features: deepening geoeconomic fragmentation, a sharp drop in output, rising interest rates, and large corrections in housing and equity valuations. - FSAP stress-test results: - Capital of all systemic deposit-taking institutions (DTIs) would remain above regulatory minima under the adverse scenario. - Liquidity stress tests indicate systemic DTIs are broadly resilient to sizable funding outflows. - Sensitivity analyses corroborate resilience findings. - Solvency and liquidity stress tests for selected insurance companies and pension funds suggest broad resilience. ### Financial Sector Oversight: Assessment and Gaps - Overall framework is robust; Canada was at the forefront of implementing Basel III. - Identified enhancements: - Strengthen operational independence and budgetary autonomy of federal and some provincial supervisors. - Enshrine supervisors’ mandates for safety and soundness and contribution to financial stability as primary legislative objectives. - Improve federal-provincial cooperation and information sharing; address NBFI data gaps. - Coordination on systemic risk monitoring has improved (creation of the Systemic Risk Surveillance Committee, SRSC), but a formal policy decision-making mechanism is lacking. - Releasable nature of the Domestic Stability Buffer (DSB) is useful; DSB should be applied to all systemically important DTIs and a positive-neutral Counter-cyclical Capital Buffer (CCyB) could be applied to other DTIs. ### Supervision and Regulatory Enhancements - Banking supervision: - Increase frequency and depth of onsite reviews. - Cover banks’ internal risk models in more depth. - Align country and transfer risk and related-party frameworks with Basel Core Principles (BCP). - Ensure supervisory resources keep pace with evolving risks. - NBFI oversight: - Strengthen federal-provincial cooperation and insurance group supervision. - For pensions, engage more closely with large public sector plans; bolster governance and internal controls oversight and require more frequent granular reporting. - Securities supervision should further harmonize provincial rules, enhance stress testing, improve custodian oversight, and align liquidity risk frameworks with FSB and IOSCO guidance. - Cyber resilience: - Develop a joint cyber strategy for the financial sector and a process to manage systemic cyber incidents. - AML/CFT: - Make supervision more risk-driven, proactive, intrusive for high-risk entities, and align resources with risk levels. - Strengthen sanctioning powers; deepen understanding of cross-border ML/TF risks. ### Crisis Preparedness and Financial Safety Nets - Resolution frameworks: - Resolution framework for banks and nonbank DTIs is mature; new cooperation and indemnity mechanisms established. - Ongoing review of federal deposit insurance coverage could help ensure adequate safety nets; consideration should be given to harmonizing coverage levels (federally and provincially) and strengthening independence of the resolution authority. - Authorities should complete the pending resolution framework for insurance companies. - Systemic liquidity management and foreign funding: - High reliance on U.S. funding markets necessitates close monitoring of foreign funding risks and review of hedging practices, notably for NBFIs. - Strengthen infrastructure for core Canadian funding markets and enhance data collection for key market segments. - Bank of Canada (BOC) should clarify its Emergency Liquidity Assistance (ELA) policy and adjust its minimum pricing. - Consider identifying regulated systemic NBFIs and granting them access to bilateral liquidity support under strict conditions to mitigate moral hazard. ### Key Recommendations (selected highlights with timing) - Systemic Risk Monitoring, Analysis, and Coordination - Enhance coordination on stress testing methodologies and results (BOC, OSFI, and AMF) — ST - Continue to closely monitor mortgage refinancing risks, household and corporate liquidity buffers, and enhance RESL data coverage and quality (BOC, OSFI, and AMF) — ST - Expand reporting and monitor LCR for all large pension plans (OSFI, FSRA, FA, PA) — ST - Strengthen data sharing and collaboration with natural hazard and climate experts and establish standard climate data and risk frameworks across provinces (OSFI, AMF, FA, PA) — MT - Financial Oversight - Provide OSFI, AMF, FSRA with an explicit mandate listing safety and soundness of supervised firms and contribution to financial stability as primary objectives (Federal, Provincial DOF) — ST - Strengthen budgetary autonomy of OSFI, AMF, and FSRA (Federal and Provincial DOF) — ST - Remove barriers for exchange of confidential information and strengthen federal-provincial supervisory cooperation, including on systemic risk issues (DOF, OSFI, PA, AMF, FSRA) — ST - Macroprudential Policy - Establish a mechanism for taking action on systemic risks (BOC, other FA and PA) — ST - Extend the Domestic Stability Buffer to all domestically important DTIs and establish a positive neutral CCyB for remaining DTIs (OSFI, AMF, other PA) — ST - Regulation and Supervision of Banks and Nonbank DTIs - Increase bank supervision intrusiveness through more frequent and deeper reviews (OSFI) — I - Align the related-party framework with international standards (FA, PA, OSFI, AMF, FSRA) — ST - Insurance and Pension Oversight - Implement consolidated supervision for insurance groups (DOF–Federal and Québec) — ST - Enhance supervision of governance and internal controls at large pension plans (FSRA, OSFI) — ST - Strengthen authorities’ powers to get confidential information from pension plans (FA, PA) — ST - Investment Fund Regulation and Supervision - Align the liquidity framework with FSB-IOSCO guidance and strengthen stress-testing (CSA) — MT - Strengthen oversight of custodians and broaden related supervisory activities (CSA) — MT - Cyber Resilience - Increase legal and regulatory powers over third-party providers (DOF, OSFI, BOC, PA) — MT - Leverage existing structures to set up a process to manage systemic cyber incidents (FA/PA) — I - AML/CFT - Deepen understanding of cross-border ML/TF risks (DOF, FINTRAC, OSFI) — I - Ensure effective risk-based supervision of banks through more intrusive engagements, dissuasive sanctions, and adequate supervisory resources (DOF, FINTRAC) — I - Crisis Preparedness and Management - Harmonize federal-provincial deposit insurance schemes and update their coverage (FA, PA) — MT - Establish a resolution framework for insurers (DOF, OSFI, PA) — MT - Strengthen domestic funding markets and closely monitor foreign funding risks (FA, PA) — ST - Raise ELA minimum rate and grant systemic NBFIs access to bilateral liquidity support (BOC) — ST *Source: EXECUTIVE SUMMARY (Canada) — IMF Financial Sector Assessment content unit.* ### 2. Trade policy uncertainties weigh on the outlook for growth, employment, and ### 2. Trade policy uncertainties weigh on the outlook for growth, employment, and ### Trade policy, growth, employment, and inflation - A further intensification of trade tensions can exacerbate trade and supply-chain disruptions given strong international linkages, even if Canada could potentially experience some short-term benefits from trade diversion. - Real GDP growth is expected to soften, mainly due to the U.S. tariffs, which will particularly impact sectors such as autos and energy, alongside weaker global conditions that dampen business sentiment. - Retaliatory tariffs and elevated underlying inflation in key Consumer Price Index (CPI) components are expected to slow the disinflationary process. ### Housing vulnerabilities and household debt - Home prices surged nearly 60 percent during 2020–22, then corrected by about 15 percent in late 2022 as mortgage rates rose. - The large price runup has increased equity for most homeowners, but mortgage holders renewing their loans since 2022 have seen sizable increases in debt-servicing costs. - Canada’s household debt-to -GDP ratio is the highest among G7 economies. - As of December 2024, approximately 60 percent of mortgages will renew by 2026 at likely higher rates, which could increase payment burdens and delinquencies if economic conditions deteriorate. - Mortgage delinquency rates stand at 0.2 percent as of December 2024. - 80 percent of total mortgage loans are fixed-rate loans (most of which get renegotiated every five years), while the remaining 20 percent are variable-rate loans (75 percent of which have fixed payments). ### Financial sector structure: size, composition, and concentration - Total assets of financial institutions reached 756 percent of GDP in 2024, increasing by 43.3 percent since 2019. - NBFI sector accounts for about 65 percent of financial system assets—mainly investment funds, pension funds, and insurance firms. - The six largest banks account for 94 percent of banking sector assets; with inclusion of another cooperative credit institution in Québec, seven entities hold over 90 percent of deposit-taking institutions' assets. - Loans represent about 50 percent of bank assets and are heavily concentrated in real estate (particularly residential). - Banks’ funding sources are roughly split between retail and commercial deposits (54 percent) and wholesale funding instruments including repos, derivatives, covered bonds, and senior debt. - Nonperforming loans (NPLs) are 0.6 percent as of December 2024, with a recent uptick driven by credit cards and auto loans. - Banking sector Common Equity Tier 1 (CET1) ratio is 13 percent and liquidity coverage ratios (LCR) for the six D-SIBs are over 125 percent. ### Insurance, pensions, and investment funds - Canada’s insurance market ranks ninth globally in terms of written insurance premiums. - Life insurance concentration: the three largest insurers account for around 85 percent of the total market; nonlife is more diversified. - Mortgage insurance is a small niche but plays an important role and is vulnerable to downturns and house price declines. - Assets of trusteed pension funds reached Canadian Dollar (CAD) 2.2 trillion in 2023 (75 percent of GDP), four-fifths held by public sector funds. - More than 16,000 pension plans exist, many extremely small; the largest public-sector plans (“Maple Eight”) are defined-benefit schemes and faced significant funding pressures during low interest rates. - Investment funds net assets grew from CAD 2.6 trillion in 2020 to about CAD 3 trillion in 2023 (about 110 percent of GDP). ### Oversight and institutional arrangements - Financial sector oversight is split across federal and provincial agencies: OSFI at federal level for many banks and insurers; provincial securities regulators coordinate under the Canadian Securities Administrators (CSA); Québec’s AMF supervises a major D-SIFI (Desjardins Group). - Crisis management and safety nets involve the Bank of Canada (BOC), the Canada Deposit Insurance Corporation (CDIC), and other federal and provincial arrangements. - Responsibility for systemic risk oversight is not explicitly assigned to a single body; the BOC plays a leading role in systemic risk surveillance. - Macroprudential tools lie with the Department of Finance (DOF) and OSFI. ### Progress since the 2019 FSAP and remaining gaps - 2019 FSAP found oversight high quality and major DTIs resilient after a severe macrofinancial shock, but noted mortgage insurers needed additional capital. - Remaining gaps: improved interagency cooperation between federal and provincial agencies; address data gaps (cross-sectoral exposures, unregulated NBFIs, funding market activities); strengthen oversight and disclosures of large public pension funds; establish a platform to formulate macroprudential policy responses; strengthen autonomy of financial authorities. ### Key systemic risks and vulnerabilities - Real estate-related vulnerabilities are among the top financial stability risks: exposures to residential real estate lending and investments raise debt serviceability and valuation concerns; CRE valuations under pressure particularly in the office subsector. - Funding markets are highly interconnected and concentrated, with leverage growing, increasing potential spillovers from external liquidity shocks amid ongoing quantitative tightening. - NBFI sector faces liquidity and leverage risks: investment funds could face liquidity risks from portfolio rebalancing, investor redemptions, use of leverage, and rising margin requirements; life insurers and pension funds are large investors in CRE and other illiquid assets and are subject to margin calls. - Canada is exposed to physical and transition climate risks: floods and wildfires are prominent hazards; Canada is the 10th largest global emitter and committed to reduce emissions by 40–45 percent by 2030 relative to 2005. ### Macrofinancial scenarios and adverse scenario design - Two scenarios evaluated: a baseline consistent with October 2024 WEO projections and an adverse scenario consistent with the IMF’s Risk Assessment Matrix (RAM). - Adverse scenario features deepening geoeconomic fragmentation, protectionism, and increased cross-border restrictions; severe supply shock through trade, migration, and FDI channels; initial inflation spike prompting central banks to pause or reverse interest rate cuts; oil prices fall as growth slows; sharp drops in residential real estate and equity prices. - The adverse scenario features a cumulative contraction of 4.8 percent in real GDP in the first two years, with the cumulative loss representing a 2.7 standard deviation shock from the historical mean. - Since the mission, April 2025 WEO projections show lower growth, and higher unemployment and inflation compared to the October baseline, but differences between the adverse scenario and April WEO remain large. ### Household vulnerability analysis (mortgages) - Mortgages represent over 70 percent of Canadian household liabilities and a significant portion of banks’ portfolios. - Two-stage approach integrating structural simulation with econometric projections (Bayesian Model Averaging) used to assess mortgage PDs. - Under the adverse scenario, mortgage PDs increase to 0.9 percent for uninsured loans and 1.4 percent for insured loans. - Unemployment is a key driver of mortgage default probabilities; lower-income households are most affected. - Mortgage PD projections should be interpreted with caution due to the short time series used for model estimation (based on data provided by the authorities). ### Corporate vulnerability analysis - Under the baseline scenario, corporate PDs remain stable at 0.5 percent in early 2025 and gradually decline. - Under the adverse scenario, corporate PDs rise sharply to 1.3 percent by late 2027. - Sectors with sharper increases in default risk include mining, quarrying, oil, construction and real estate. - Firm-level regressions emphasize the importance of liquidity ratios and cash buffers in driving corporate default risks. ### Bank stress testing: solvency and liquidity - Solvency stress tests on seven systemic DTIs: under the Baseline scenario, aggregate CET1 capital ratio rises to 15.7 percent by 2027 from 13.7 percent in 2024. - Under the adverse scenario, the CET1 ratio declines by 2.3 percentage points at the trough but remains above the regulatory minimum; individually, all DTIs remain well above regulatory thresholds. - Sensitivity analyses: - Market risk sensitivity implies an additional CET1 decline of 1.1 percentage points relative to the main adverse scenario. - Higher PDs for manufacturing and commodity sectors cause an additional CET1 drop of 40 basis points against the adverse scenario. - More conservative PDs across all corporate and household loan portfolios cause an additional drop of 1.7 percentage points with respect to the adverse scenario. - In all sensitivity analyses, institutions remain above regulatory thresholds. - Liquidity stress tests: - LCR-based tests across 12 scenarios: under individual retail scenarios, aggregate LCR remains above the regulatory minimum of 100 percent; under wholesale and combined scenarios, aggregate LCR falls somewhat below 100 percent. - CAD LCR is more sensitive to retail deposit outflows; USD LCR is more sensitive to wholesale outflows. - Cash flow analysis used two indicators: cumulative net funding gap and counterbalancing capacity, across 20 scenarios of increasing severity based on end 2024 Net Cumulative Cash Flow (NCCF) data. *Source: IMF staff report (Canada FSAP chapter excerpt).* ### 27. The seven systemic DTIs can withstand liquidity shocks over a three-month horizon ### 27. The seven systemic DTIs can withstand liquidity shocks over a three-month horizon ### Liquidity stress results for systemic DTIs - Under most cash flow scenarios, the seven systemic DTIs can withstand liquidity shocks over a three-month horizon (Figure 17). - Under the milder scenario the system would maintain a liquidity surplus for horizons shorter than six months and in the most severe scenario, for horizons equal or shorter than one month. - Focusing on a three-month horizon: - The system would maintain liquidity surpluses even under more severe scenarios, experiencing shortfalls only in the three most aggressive scenarios. - Under the most aggressive scenario, the aggregate shortfalls represent 12 percent of the initial counterbalancing capacity. ### Recommendations to preserve system resilience - Increase coordination and analysis around vulnerabilities among the Bank of Canada (BOC), OSFI, and AMF. - Enhance and formalize cooperation on stress testing methodologies, results, and implications. - Continue efforts to enhance structural models on housing risks. - Develop corporate sector stress tests to strengthen analysis of potential vulnerabilities. - Establish credit registers for corporate, commercial and consumption loans. - Continue work towards improving the quality and coverage of Real Estate Secured Lending (RESL) data. ### Interconnectedness and contagion analysis - An interconnectedness and contagion analysis evaluated funding and credit shock transmission among six D-SIBs and across sectors and borders using the Espinosa-Vega Sole model. - Cross-sectoral and cross-border risks are relatively high; multiple transmission channels imply credit and funding risks can propagate substantially across sectors. - Although interbank exposures are significant, spillover risks from bank failures are mitigated by banks’ capital buffers; strong capital levels serve as a cushion against losses in terms of direct impacts. ### Insurance and pension risk analysis — scope and coverage - Solvency analysis covered: - Seven life insurers (around 90 percent of life insurance sector assets). - 17 property and casualty (P&C) insurers (around 50 percent of P&C assets). - 40 defined-benefit and hybrid pension schemes supervised by OSFI and FSRA. - Liquidity risk analysis covered: - Three life insurers. - 19 pension plans, including six of the “Maple Eight” public pension plans—covering more than 50 percent of pension assets. ### Insurance solvency stress test findings - Life insurers: - Under an adverse scenario aligned with the banking sector scenario, initial effects (long-term interest rate increases and CAD depreciation) improve median life insurer solvency ratio from 136 to 168 percent. - Solvency ratios subsequently decline to 142 percent in the second year and 121 percent in the third year. - No life insurer sees its solvency ratio fall below the regulatory threshold; most remain above or close to internal operational capital targets. - An additional sensitivity with a large equity price shock corroborated resilience. - P&C insurers: - Median solvency ratio initially falls from 259 to 222 percent in the first year, then to 218 percent the following year, before recovering to 237 percent in the third year. - Shocks mainly affect investments; liabilities remain largely stable. ### Pensions’ funding risk analysis - Pension sector begins from a robust funding position prior to the simulated stress; funding has improved since 2021 with rising interest rates. - In the adverse three-year scenario: - Funding ratios change only marginally for the majority of plans. - The adverse impact is largest in the second year: funding ratios fall by 13 and 16 percentage points for the median large public sector and private sector plans, respectively. - By the third year, funding ratios stabilize and increase slightly for most plans. - Over a quarter of plans would experience a funding deficit in the third year (which would not trigger any immediate refunding requirement). - A sensitivity analysis for equity risk showed a considerable impact on private sector plans but confirmed overall scenario results. ### Insurance and pensions liquidity risk analysis - Liquidity stress scenario assumptions: - Short-term CAD interest rates increase overnight by 150 basis points. - CAD depreciates against other major currencies. - Life insurers: - Resilient to the tested liquidity shock due to sizable holdings in highly liquid investments (Figure 21). - 69 percent of margin calls stem from interest rate derivatives. - Almost the full amount of margin calls could be met through settlement “in kind,” avoiding liquidation of collateral assets. - Pension plans: - Margin calls can be sizable for some plans but plans remain able to source required liquidity. - Around 55 percent of liquidity would be sourced from financing transactions (including expiring reverse repos and committed credit lines). - Another 31 percent would be funded through highly liquid assets; many use bilateral swap transactions allowing settlement in kind. ### Recommendations for insurers and pension plans - Strengthen stress testing for insurers with comprehensive macroprudential stress tests in the sector. - Require more frequent and granular data on the largest pension plans to facilitate top-down risk analysis. - Authorities other than FSRA should monitor LCR for large pension plans. ### Climate risk analysis — overview and key findings - Authorities have embarked on the Standardized Climate Scenario Exercise (SCSE) covering transition risks and physical risks (floods and wildfires); authorities should reduce reliance on private data vendors and increase data sharing and collaboration with climate experts. - FSAP independent climate analyses covered the seven systemic DTIs and focused on credit-risk channels. Physical risk (wildfires) - A significant portion of mortgage loans is located in areas with very high to extreme fire-weather, and this portion is expected to increase. - The exploratory wildfire risk assessment estimated damages to residential buildings and potential losses to DTIs conditional on mortgage defaults; the analysis linked wildfire damage to DTIs’ loss given defaults (LGDs), accounting for mortgage and P&C insurance. - Findings: - DTIs’ losses could be considerable under the most severe scenarios but are sensitive to assumptions. - LGDs increase more under the high emission scenario than the medium emission scenario relative to historical climate. - LGDs of loans in Saskatchewan and Manitoba would increase substantially more than in other affected provinces. - Loans with high Loan-to-Value (LTV) ratios are more sensitive to wildfire losses (though they represent a small portion of mortgages). - Results are sensitive to the portion of damages absorbed by P&C insurance and to the damage function (e.g., complete destruction assumptions would significantly raise DTIs’ losses). Transition risk - Transition analysis estimated DTIs’ credit losses from exposures to nonfinancial corporates (NFCs) under three scenarios: current policies, orderly transition (“Net-Zero 2050”) and disorderly transition (“Delayed Transition”). - Method: IMF-ENV model (Chateau and others, 2025) to derive scenario-conditional macroeconomic and sectoral paths up to 2040, with a micro simulation linking these to NFCs and DTIs’ balance sheets. - Findings: - Sectoral PDs and LGDs generally increase modestly with significant variation across sectors; notable adverse impacts in oil and gas. - Adverse impact larger under Net-Zero 2050 than Delayed Transition for most of the simulation period, but from 2040 Delayed Transition impacts exceed Net-Zero 2050 for most sectors. - DTIs’ credit losses are estimated to increase between 3.8–7.1 percent under the Net Zero 2050 and Delayed Transition scenarios relative to current policies by 2040. ### Interpretation caveats on climate results - Climate risk analysis is emerging, subject to many model and data constraints; results are indicative and should be treated with caution. - FSAP climate analyses focus on a specific credit risk channel and capture only direct impacts, not potential indirect and systemic effects; thus they may underestimate climate risks for the banking system. ### Financial sector oversight — strengths and institutional issues - Oversight across agencies is robust; new supervisory frameworks strengthen risk-based oversight and alignment with international standards. - Institutional issues to address: - Explicitly enshrine promoting safety and soundness and contributing to financial stability as primary objectives in legislation for federal and provincial supervisors (OSFI, AMF, and FSRA). - Strengthen operational independence and budgetary autonomy of supervisory authorities. - Remove barriers to exchange of supervisory information and conclude Memorandums of Understanding (MOUs) between OSFI and provincial authorities. ### Macroprudential policy and tools - Improvements since last FSAP: - Creation of SRSC enhanced systemic risk discussions and produced working groups and data sharing agreements. - Other fora (CSA, CUPSA) promote cooperation and data comparability. - Remaining gaps and recommendations: - Key data gaps remain, particularly on nonbank activity; strengthen information sharing between federal and provincial supervisors. - Build comprehensive credit registries to improve understanding and calibration of macroprudential tools. - Develop a mechanism to take action: consider designating HOA as an “action” committee for macroprudential coordination or set up a HOA policy working group to recommend actions on specific systemic risks. - Toolkit observations: - Borrower-side: an LTV limit of 80 percent effectively applies to all uninsured mortgages. - Borrower-level stress test: minimum qualifying rate (MQR) has proven effective and should be maintained. - Capital tools: OSFI applies a DSB to DSIBs similar to a CCyB; recommendation to apply DSB to all systemic DTIs (including Québec’s D-SIFI) and include provincial supervisors (including AMF) in DSB setting. - Consider setting a positive neutral CCyB for non-systemic DTIs in parallel. - Recent introduction of a loan-to-income (LTI) limit for uninsured mortgages is welcome but needs clearer communication about objectives, functioning, and monitoring; monitor impact and take further action if housing vulnerabilities build. ### Banking regulation and supervision - A full BCP assessment was conducted based on the 2024 BCP standard covering OSFI. - Legal and institutional points: - OSFI has legal powers to fulfill its mandate, but institutional legal underpinnings could be enhanced; the Minister of Finance has a prominent statutory role and must sign-off on OSFI’s budget. - Promote safety and soundness and contributing to financial stability as OSFI’s primary objective in the OSFI Act. - Supervisory framework: - Regulatory and supervisory framework is sound, principles- and risk-based. - The final Basel III reforms were implemented effective February 1, 2023. - OSFI is at the forefront of liquidity risk requirements and supervisory practices; new supervisory framework (April 2024) improved communication of supervisory issues. - Areas for supervisory strengthening: - Achieve more intrusive supervision with more frequent and deeper reviews; resource constraints have impacted supervision of core banking areas. - Enhance supervisory practices on operational resilience and strengthen the sanctioning regime (monetary penalties infrequently used and current low caps limit effectiveness). - Further enhancements needed in reviewing internal model results, covering country and transfer risk, and aligning related-party prudential framework with the BCP standard. *CANADA INTERNATIONAL MONETARY FUND* ### 61. Anti-money laundering and countering the financing of terrorism (AML/CFT) ### Anti-money laundering and countering the financing of terrorism (AML/CFT) ### AML/CFT supervision and enforcement - FINTRAC is the financial intelligence unit and the sole AML/CFT supervisor since 2021. - The regulatory framework is described as sound. - More frequent in-depth compliance reviews are needed. - Penalties are currently too low to serve as an effective deterrent for noncompliance. - The authorities are planning to strengthen the sanctioning regime. - In its 2024 Fall Economic Statement, the Canadian government announced its intent to propose legislative changes increasing administrative monetary penalties for breaches of AML/CFT requirements. *Italicized source attribution: Anti-money laundering and countering the financing of terrorism (AML/CFT) — content unit from the provided IMF source PDF.* ### 91. The BOC should also consider identifying regulated systemic NBFIs and granting them ### 91. The BOC should also consider identifying regulated systemic NBFIs and granting them access to bilateral liquidity support. ### Bilateral liquidity support for systemic NBFIs - Recommendation: The BOC should consider identifying regulated systemic NBFIs and granting them access to bilateral liquidity support. - Rationale: - Providing bilateral support may be key if stress in a large interconnected NBFI poses a contagion risk or disrupts financial intermediation. - The Contingent Term Repo Facility (CTRF) is intended for system-wide stress and activating it too early may trigger market speculation. - Establishing clear eligibility and readiness for bilateral support in response to severe disruptions caused by idiosyncratic shocks that could potentially become systemic would enhance market stability. - Safeguards: Strong safeguards should be implemented to mitigate moral hazard. ### Authorities' views on FSAP findings and recommendations - Overall stance: - The authorities valued the constructive discussions and appreciated the recommendations made by the FSAP. - They broadly concurred with the findings of the systemic risk analysis and appreciated recognition that banks and other financial institutions remain resilient overall in the adverse scenarios agreed upon and presented in the FSAP. - The authorities were receptive to many FSAP recommendations and open to exploring opportunities to strengthen institutional arrangements, where feasible. - Institutional framework and macroprudential oversight: - Authorities' perspective: Supervisory authorities have a high degree of budget autonomy and operational independence in practice. - View on feasibility: FSAP recommendations on supervisory independence are considered not feasible within the Canadian system of Parliamentary democracy and ministerial accountability. - On macroprudential oversight: Coordination on monitoring systemic risks has improved, but a federal-provincial decision-making mechanism is considered impractical within Canada’s supervisory framework and federal-provincial division of powers. - Provincial regulators: Noted interest in signing a MOU with the federal regulator; effective and sustainable information sharing is one way to achieve better collaboration and coordination of systemic risk. - Supervisory activities and resourcing: - Authorities welcomed recognition of Canada’s progress on regulatory cooperation and implementation of financial and nonfinancial risk safeguards. - Agreement that more resources are needed to further enhance the depth and scope of supervisory work. - On AML/CFT supervision: Authorities acknowledged the benefit of deeper understanding of cross-border ML/TF risks to supplement risk assessment, but believed enhancing AML/CFT supervision need not necessarily require additional resourcing. - The government has announced its intention to strengthen the AML/CFT penalty framework. - Provincial securities regulators: Believed oversight of securities and derivatives achieves highly harmonized outcomes while respecting Canada’s constitutional division of authority over securities and derivatives. - Crisis management and related measures: - Authorities broadly agreed with FSAP findings on crisis management but offered different perspectives in some areas. - Mandating harmonization of federal and provincial deposit insurance schemes: Considered unrealistic given different jurisdictions and considerations. - On recommendation to raise ELA pricing: The BOC noted that associated stigma already discourages use and there is discretion to charge a higher rate if deemed appropriate based on the context at the time of stress. ### Macroeconomic and financial context (selected findings from figures and charts) - Real economy and inflation: - Real GDP: "Real GDP was recovering post-pandemic but slowed down following monetary tightening" and "... GDP is expected to pick up as the policy stance eases." - Inflation: "Following a spike in 2022, inflation has been declining and is now back within BOC’s inflation target range." - Market volatility and yields: - "Long-term bond yields have increased while volatility has fallen." - Note: "VIX data of Canada during 2020M2-2021M4 are not avaliable." - Credit, housing, and household metrics: - Credit growth: "declined during the tightening cycle but has recently started to recover..." - Credit-to-GDP: "somewhat above pre-pandemic levels." - Mortgages: "Mortgages represent a substantial share of financial sector assets..." - New lending: "new lending picking up for uninsured mortgages, while insured lending remains subdued." - Share of new mortgages with an LTI ratio above 45.0% tracked in charts (label preserved as "LTI is loan-to-income"). - Mortgage Debt Service Ratios: Charts show "Share of all new mortgages with a mortgage DSR greater than 25% (LHS)" and "Median mortgage DSR (RHS)." (Note: DSR is the debt service ratio.) - Financial system structure and NBFI prominence: - "Canada’s NBFI sector is among the largest relative to the size of the economy." - Banking sector: "Banks have large cross-border US exposures." - Comparison: "The size of the financial system is comparable to the average of other advanced peer economies." - Financial soundness and banking sector: - Regulatory capital, NPLs, profitability, liquidity: Figures compare Canada with other G7 countries and show: - "Regulatory Capital to Risk-Weighted Assets (In percent)" - "Non-performing Loans to Total Gross Loans (In percent)" - "Return on Assets (In percent)" - "Interest Margin to Gross Income (In percent)" - "Liquid Assets to Total Assets (In percent)" - "Liquid Assets to Short Term Liabilities (In percent)" - Banking concentration: "The banking system is highly concentrated." - Balance sheet growth: "Banks’ balance sheets expanded by 42 percent since the last FSAP, reflecting a faster growth rate compared to other G7 countries." - Asset quality: "NPL ratios remain low despite a recent increase." - Profitability and capital: "Net income has remained strong despite recent declines due to rising interest expenses and loan loss provisions" and "banks remain well capitalized." - Funding composition and loan portfolio (2023 snapshots): - Funding composition (2023): retail and commercial deposits, repos, senior debt, covered bonds, subordinated debt, derivatives, trading liabilities, other liabilities (percent breakdowns shown in charts). - Loan portfolio (2023): REL Mortgages, Credit Cards, Other Secured Consumer, Other Consumer, CREL, Other Financial Institutions, Manufacturing, Wholesale & Retail Trade, Agriculture, Other Corporate, Other (percent breakdowns shown in charts). - Real estate and housing affordability: - Housing prices: "With immigration surging after the pandemic, housing prices peaked in 2022..." - Affordability: "Housing affordability is the lowest of G7 countries" and "the gap with other G7 countries remains wide." - Construction: "Construction activity levels have varied across provinces" and "new units did not keep pace with the increase in demand as the population grew." - Household and corporate balance sheets: - Households: "Household wealth and liabilities, relative to GDP, have dropped since the pandemic..." and "household debt service to income has increased due to higher interest costs but has been stabilizing since late 2024." - Indebtedness: "Household indebtedness ranks among the highest in industrial countries... driven by mortgage loans." - Corporates: "Corporate debt and debt service is also high relative to other industrial countries... despite some post-pandemic moderation." - Climate risks: - Natural hazards: "Floods and wildfires are among the costliest and... most frequent natural hazards in Canada." - Climate projections: "By end century, under RCP8.5, wildfire intensity and... the length of fire season are projected to increase substantially relative to 1971–2000 across most of Canada." - Emissions: "Canada is also exposed to transition risks, being the tenth largest emitter in the world." - Emissions by sector (2021): "Oil and Gas 28% ; Electricity 8% ; Transport 22% ; Heavy Industry 11% ; Buindings 14% ; Agriculture 10% ; Waste and Others 7%." - Historical natural hazard shares: Flood (33% historical losses; 39% historical frequency), Wildfire (19% losses; 13% frequency), Storms and others as charted. *Source: Excerpts from the provided IMF chapter/section text and figures.* ### 4.9 percent.... ### 1canea2025001-source-pdf - 4.9 percent.... ### Major scenario outcomes - "4.9 percent...." - Unemployment increases to "9.6 percent." - Inflation increases moderately, "by about 1pp...." - Short-term rates increase "60 bps—driven by high inflation expectations...." - There is an increase in long term rates... - The exchange rate depreciates "by about 10 percent." ### Asset prices, wages, and commodity impacts - Stock prices fall "by 33 percent..." - House prices drop "by 25 percent." - Nominal wage experiences a decline of "0.5 percent...." - Oil prices slump "by 33 percent." ### Time-series context shown (dates and series labels preserved) - Charts and series labeled for "2024q3", "2025q3", "2026q3", "2027q3" with scenarios "Adverse" and "Baseline" for: - Short Term Rate - Long Term Rate - Exchange Rate YoY Change - Stock Price YoY Change - Nominal Wage YoY Change - House Prices Change YoY - Oil Price YoY Change ### Movement in Macrofinancial Scenario Fundamentals in the United States (figured context) - Series for USA, "2024-2027", include: - Real GDP Growth YoY - Unemployment - Short Term Rate - Stock Price YoY Change - House Prices Change YoY - Date points shown: "2024q3", "2025q3", "2026q3", "2027q3" - Scenario labels: "Adverse" and "Baseline" ### Sector vulnerabilities and solvency - Figure headings indicate "Canada: Household and Corporate Sector Vulnerabilities." - Figure heading indicates "Canada: Solvency Stress Test Results." - "The CET1 ratio for the 7 systemic DTIs declines by" (statement incomplete in source). *Sources: World Economic Outlook and IMF staff calculations.* ### 2.3 percentage points under the adverse scenario .... ### 1canea2025001-source-pdf - 2.3 percentage points under the adverse scenario .... ### Solvency stress test — Banking sector - Under the adverse scenario, capital depletion across sensitivity analyses is shown in percentage points: Adverse, Sensitivity 1. Market Risk, Sensitivity 2. Manufacturing & Commodity, Sensitive 3. Conservative PDs with reported axis labels including values from -4.5 to 1 in the chart scale. - Over the three-year horizon, the 7 systemic DTIs face: - lower net interest income, - higher loan losses, - lower non-interest income, - higher non-interest expense, - lower taxes, - lower dividend distribution, - higher RWAs under the adverse scenario than under the baseline. - A large portion of cumulative provisions consists of business and CRE loans; the ratio of cumulative provisions over initial outstanding amount is higher for credit cards loans. - Market risk losses are material only in the first year of the scenario horizon; gains on securities contribute positively in the outer years. - Source attribution for solvency sensitivity and stress test results: IMF staff calculations and IMF staff estimates. ### Liquidity Coverage Ratio (LCR) stress test and cash flow analysis - LCR stress testing design: - Three market scenarios combined with four run-off rates scenarios for a total of 12 scenarios of varying severity. - Aggregate LCR for the 7 systemic DTIs remains above 100 percent under the retail scenarios. - Under the wholesale scenario the LCR for some institutions falls below the threshold. - Haircuts and run-off table excerpts (as reported): - Level 1 assets: 100% / 95%-100% / 90%-100% - Level 2A assets: 85% / 75%-80% / 65%-75% - Level 2B assets: 50%-75% / 40%-70% / 30%-70% - Retail run-off rates: Stable Deposits 3-5% / Less-Stable Deposits 10% (regulatory column examples) - Wholesale run-off rates: Stable Deposits 3-5% / Less-Stable Deposits 10%-30% (examples shown) - Cash flow analysis results: - The 7 systemic DTIs would maintain liquidity surpluses under the milder scenario for horizons shorter than 6 months. - Under the most aggressive scenario the systemic DTIs would maintain liquidity surpluses for all horizons equal or shorter than one month. - Focusing on a three-month horizon, the 7 systemic DTIs experience shortfalls only in the three most aggressive scenarios, with heterogeneity at each institution’s level. - Liquidity Surplus/Shortfall by D-SIFI chart scale: from -400 to 800 (Billion CAD) with individual banks Bank 1 … Bank 7 plotted. ### Cash Flow Scenarios — granular parameters and haircuts/run-off ranges - Scenarios span a linear grid from Mild Scenario to Severe Scenario; selected parameter ranges reported: - Government Securities: High Rated Government Securities 0.5%-5.0% to 20%-60%; Medium Rated Government Securities 10%-20% to 30%-100%; Low/Not Rated Government Securities 100% to 100%. - Mortgage Backed Securities (MBS): Agency MBS (High rated) 4.0%-15.0%; Other 100.0%-100.0%. - Corporate Bonds and Paper: High rated 5.0%-9.0% to 10.0%-20.0%; Medium rated 10%-11% to 50%-100%; Low/not rated 100% to 100%. - ABS and ABCP: High rated 2.0%-10.0% to 40.0%-100.0%; Other 100% to 100%. - Haircuts and run-off rates (selected ranges reported): - Retail and Small Business Demand / Notice Deposits Week 1-4: 0.25%-3.50% (Mild) to 1.0% - 8.0% (Severe); Month 2-12: 0.75%-5.0% to 2.0%-12.0%. - Term Deposits Week 1-4: 0.25%-1.75% to 0.75%-5.5%; Month 2-12 severe up to 1.50%-8.50%. - Commercial, Corporate and Wholesale Deposits (Operational vs Non-Operational): ranges include 0.75%-2.50% to 3.50%-4.0% and 3.00% to 6.0%-7.0% (examples reported). - Note: See forthcoming Technical Note on stress testing and financial stability for Cash Flow scenarios’ granular parameters (as referenced). ### Insurance stress testing — Life and P&C insurers - Life insurance: - Assets decline significantly in year 1, followed by a further slight decline in year 2 and a strong recovery in year 3. - Liabilities show larger movements than assets in years 1 and 3, driven by long durations of insurers’ technical liabilities. - Solvency ratios: improve in year 1 due to lower liabilities, deteriorate in years 2 and 3, but remain above regulatory thresholds. - Charted percentile/median changes: Investments -Life (Y1 Y2 Y3) change in percent scale shows -15% to 15%; Liabilities -Life change -20% to 25%; Solvency -Life ratio in percent Y0 Y1 Y2 Y3 scale 0% to 250%. - Property & Casualty (P&C) insurance: - P&C insurers’ assets are less affected by market and credit shocks of the adverse scenario; liabilities are less sensitive than those of life insurers. - Solvency ratios improve in year 1 due to lower liabilities, start deteriorating in year 2, but remain above regulatory thresholds. - Charted ranges: Investments -P&C change in percent Y1 Y2 Y3 up to ±15%; Liabilities -P&C change in percent around -3% to 3%; Solvency -P&C ratio up to 400%. ### Pensions — funding and liquidity results - Funding ratios: - Funding ratios of large public sector pension plans decline slightly in year 1 then further deteriorate in year 2, by around 10 percentage points for the median plan. - Private sector pension plans would improve very slightly in year 1 before declining in year 2. - Asset allocation differences: - Large public sector plans: very diversified investments with larger allocations to real estate and other alternative assets. - Many medium-sized private sector plans: more concentrated investments, mainly in stocks. - Liquidity/margin calls: - In total, margin and collateral calls in the tested scenario would amount to about CAD 32 billion, mostly due within t+1. - Life insurers and pension plans would be able to source more liquidity than needed for immediate settlement, stemming mostly from financing transactions (repos, credit lines) and highly liquid assets. - Life insurers are able to meet almost the entire margin calls through in-kind settlement; pension plans use cash settlement particularly for interest rate derivatives. - Reported chart breakdowns: Margin and Collateral Calls by timing t+1 t+2 t+3 (or later) in CAD bn; Sources of Liquidity t0 => t+1 t+1 => t+2 t+2 => t+3 in CAD bn with Cash, deposits; Financing transactions; Use of liquid assets; Share of In-Kind Settlement by Total/Pensions/Insurance in percent. ### Climate risk — Wildfire and Transition analysis - Wildfire risk: - Almost half of total loans is currently located in areas with very high or extreme fire-weather and concentrated exposures. - This portion increases under both medium and high-emissions scenarios (RCP4.5 mid-century and RCP8.5) with significant migration of loans to very-high and extreme fire-weather by mid-century. - DTIs’ residential real estate collateral will be exposed to longer fire seasons under these scenarios. - Loans with high LTV are more sensitive than others; some provinces are more affected than others. - Categorization uses FWI levels (Low, Moderate, High, Very High, Extreme) and loan amount quantiles q1–q4; maps and subdivision-level analyses referenced. - Transition risk: - Under the Delayed Transition scenario, carbon prices would need to accelerate sharply and surpass those in the Net Zero 2050 scenario as we approach mid-century. - Macro impacts by 2040 are somewhat greater under the Delayed Transition scenario compared to the Net Zero 2050 scenario. - Output would decrease for most sectors, with electricity non-renewable sector output declining substantially as production transitions to renewable sources. - Sectorial PDs and LGDs would generally increase modestly, with notable impacts for the oil and gas sector. - Cumulative impact is greater under the Net Zero 2050 scenario; however, DTIs’ credit losses under Delayed Transition begin to exceed those under Net Zero in 2040. - DTIs’ credit losses are estimated to increase between 3.8–7.1 percent under the Net Zero 2050 and Delayed Transition scenarios relative to Current Policies by 2040. - Sources: IMF staff calculations. ### Macro and financial system indicators (selected figures and projections) - Key national aggregates: - Nominal GDP (2023): Can$ 2,892 billion (US$ 2,142 billion) - Quota: SDR 11,023.9 million - GDP per capita (2023): US$ 53,607 - Population (2023): 40.0 million - Main exports: Oil and gas, autos and auto parts, gold, lumber, copper. - Real GDP (annual series Est./Proj.): - 2021 6.0 | 2022 4.2 | 2023 1.5 | 2024 1.5 | 2025 1.4 | 2026 1.6 | 2027 1.7 | 2028 1.6 | 2029 1.6 | 2030 1.5 - Unemployment rate (average): - 2021 7.5 | 2022 5.3 | 2023 5.4 | 2024 6.4 | 2025 6.6 | 2026 6.5 | 2027 6.3 | 2028 6.1 | 2029 6.1 | 2030 6.0 - CPI inflation (average): - 2021 3.4 | 2022 6.8 | 2023 3.9 | 2024 2.4 | 2025 2.0 | 2026 2.1 | 2027 2.0 | 2028 2.0 | 2029 2.0 | 2030 2.0 - Gross Debt (percent of GDP): - 2021 112.6 | 2022 104.2 | 2023 107.7 | 2024 110.8 | 2025 112.5 | 2026 110.9 | 2027 109.4 | 2028 107.9 | 2029 106.2 | 2030 104.1 - Household Credit Growth (annual average): - 2021 10.8 | 2022 9.9 | 2023 5.0 | 2024 3.6 | 2025 3.5 | 2026 3.5 | 2027 3.5 | 2028 3.5 | 2029 3.4 | 2030 3.4 - Current account balance (percent of GDP): - 2021 0.0 | 2022 -0.3 | 2023 -0.6 | 2024 -0.5 | 2025 -0.1 | 2026 -0.3 | 2027 -0.6 | 2028 -0.9 | 2029 -1.2 | 2030 -0.9 - Sources for Table 2: Haver Analytics and Fund staff calculations. ### Financial system structure and financial soundness indicators (selected) - Table excerpts (Billions of CAD and percent of total assets / percent of GDP reported across series): - Chartered banks (selected year totals): 2014 3,402.6; 2019 4,648.2; 2023 6,633.6; 2024 6,172.3 (Billions of CAD). - Insurance and pension funds total assets trend to 4,064.5 (most recent reported). - Mutual funds total assets 3,789.3 (most recent reported). - Financial Soundness Indicators (selected, percent): - Total capital ratio: 2014 14.2 | 2015 14.2 | 2016 14.8 | 2017 14.8 | 2018 15.2 | 2019 15.3 | 2020 16.1 | 2021 17.2 | 2022 17.4 | 2023 17.1 | 2024 16.9 - Tier 1 ratio: 2014 11.9 | 2015 12.1 | 2016 12.5 | 2017 12.9 | 2018 13.2 | 2019 13.2 | 2020 13.9 | 2021 15.1 | 2022 15.3 | 2023 15.2 | 2024 15.0 - Return on assets: 2014 1.1 | 2015 1.0 | 2016 1.0 | 2017 1.1 | 2018 1.2 | 2019 1.1 | 2020 0.8 | 2021 1.1 | 2022 1.2 | 2023 0.8 | 2024 0.8 - NPLs to Gross Loans: 2014 0.5 | 2015 0.5 | 2016 0.6 | 2017 0.4 | 2018 0.5 | 2019 0.5 | 2020 0.5 | 2021 0.4 | 2022 0.3 | 2023 0.5 | 2024 0.6 - Liquid assets to short-term liabilities: 2014 50.5 | 2015 45.4 | 2016 54.6 | 2017 49.4 | 2018 48.5 | 2019 44.1 | 2020 78.0 | 2021 79.6 | 2022 58.5 | 2023 49.6 | 2024 52.7 - Sources: StatCan, National Balance Sheet Account and Fund staff calculations; IMF FSI database and IMF staff calculations. ### Implementation status — 2019 FSAP Key Recommendations (selected summary) - Raise required capital for mortgage exposures at both banks and mortgage insurers; increase risk-based differentiation in mortgage pricing (OSFI, AMF, and DOF): Partially implemented. - OSFI requires IRB bank PD models to include minimum 10 percent of data from stress periods; model risk resources limited to 5 staff for all model-related tasks. - Mortgage Insurer Capital Adequacy Test (MICAT) updated for IFRS 17. - Develop policy framework for managing a housing market downturn (BOC, AMF, BCSC, OSC): Partially implemented. - Banks subject to expectations for treatment of households with payment difficulties; OSFI introduced LTI limits; AMF updated Residential Hypothecary Lending Guideline in February 2024. - Modernize systemic risk oversight framework, federal-provincial platform (HOA): Partially implemented. - SRSC improved dialogue and data sharing; HOA MOU signed; formal mechanism to coordinate preventative action remains lacking. - Develop comprehensive systemic risk surveillance framework and address data gaps: Partially implemented (ongoing efforts). - BOC advanced voluntary data sharing, OTC derivatives proof-of-concept analysis, and transactions-level data usage; gaps remain around funding market activities and aggregate data publication. - Strengthen oversight of large public pension funds and transparency: Partially implemented. - FSRA stepped up engagements and developed supervisory framework and LCR reporting for large public plans. - Strengthen autonomy and governance of financial sector authorities (BOC, OSFI, FICOM): Not implemented. - Complete Cooperative Capital Markets Regulatory System (CMRA) initiative: Not implemented. - Enhance inter-agency cooperation with additional MOUs (OSFI, AMF, provincial authorities): Not implemented. - Limited formal federal-provincial coordination on deposit-taking supervision; no MOUs between OSFI and major provincial supervisors such as AMF. - Address shortcomings in regulatory/supervisory frameworks related to mortgage credit risk; adopt common loan forbearance framework: Partially implemented (ongoing efforts). - AMF published Guideline on management of expected credit losses in June 2024; OSFI increased supervisory attention and issued letter on RESL forbearance March 2024. - Strengthen legal foundation for insurance group-wide supervision: Not implemented. - OTC derivatives and duties towards clients reforms; oversight of high-impact firms and market-wide stress capacity: Partially implemented. - Task SAC with Canada-wide crisis preparedness and strengthen CDIC operational independence: Partially implemented. - Expand recovery planning and resolution planning; adopt depositor preference; strengthen resolution powers: Partially Implemented. - OSFI to apply comprehensive recovery planning requirements proportionally based on systemic importance; WURA depositor preference legislation not updated yet. - Operationalize emergency lending assistance (ELA) with key provinces and testing: Implemented. - Bill C-59 received Royal Assent on June 20, 2024; steps taken to expand Payments Canada membership and provincial indemnities. - Further develop contingency plans for market-wide liquidity provision, foreign-currency ELA capacity: Partially implemented. - CTRF implemented and tested; BOC lacks operational capacity to provide ELA in foreign currency and relies on government support and swap lines. ### Risk Assessment Matrix (selected risks, likelihood, and expected impacts) - Trade policy and investment shocks: Overall Level of Concern High. - Expected impacts: reduced external trade, disrupted FDI and supply chains, U.S. dollar appreciation, tighter financial conditions, higher inflation, damaged asset quality. - Regional conflicts: Medium likelihood. - Expected impacts: global and domestic slowdown, commodity price volatility, higher inflation, higher interest rates, tighter financial conditions, higher credit risk, valuation losses. - Tighter financial conditions and systemic instability: Medium likelihood. - Expected impacts: bond valuation losses, higher credit risk, potentially lower net interest income, higher USD funding costs if not hedged. - Deepening geoeconomic fragmentation: High level of concern. - Expected impacts: reduced demand for Canadian exports, constrained supply chains, increased inflationary pressures, reduced potential growth, damaged asset quality. - Cyberthreats: High level of concern. - Expected impacts: disruption to payment and financial systems, threat to financial stability. - Climate change (extreme events): Medium level of concern. - Expected impacts: credit, liquidity, and operational risks to financial institutions. - House price correction: Medium level of concern. - Expected impacts: dampened consumption and investment, higher unemployment, wider LTV ratios and increased LGDs. *Source: IMF staff calculations and estimates, as reported in the provided PDF content.* ### Appendix I. Stress Test Matrix (STeM) ### Appendix I. Stress Test Matrix (STeM) ### Banking Sector: Solvency Test — Institutional perimeter and data - Institutions included: - Seven domestic systemically important deposit-taking institutions (DTIs), including Québec’s systemic DTI (Desjardins) and the six domestic systemically important banks (D-SIBs): Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada. - Royal Bank of Canada and Toronto-Dominion Bank are also considered global systemically important banks (G-SIBs). - Market share: - The six D-SIBs represent about 93.6 percent of banking sector assets (excluding foreign bank branches). - The seven systemic DTIs represent above 90.2 percent of DTIs’ assets. - Data and baseline date: - Data sources include OSFI regulatory returns and supervisory data, loan level information from the RESL dataset; AMF regulatory returns and loan level information for RESL. - Scope of consolidation: Global consolidated group basis. For Desjardins insurance business activities are excluded to facilitate comparability with D-SIBs. - Cut-off date: end-October 2024 ### Banking Sector: Solvency Test — Methodology and horizon - Methodology: - Balance-sheet based approach. - Projections of key balance sheet, income statement, and capital account items conditional on scenarios. - Static balance sheet assumption. - Satellite models for macro-financial linkages: - Credit Risk: - Mortgage Loans: Household financial conditions adjusted based on macro developments; employment dynamics modeled; loan-level risks via iterative simulations; PD estimated using a BMA approach. (Refer to Household Vulnerability Analysis STeM section.) - Corporate Loans: Corporate stress test satellite models linking credit risk variables with macro variables estimated using a BMA methodology. - Net Interest Income: Projected using a structural model reflecting repricing dynamics; historical data on interest rates for newly originated assets/liabilities used to estimate pass-through of policy rates to new lending and funding rates. Non-performing loans will not generate any income. - Market risk: Valuation losses from full revaluation of sovereign securities, corporate fixed income debt securities and equity holdings calculated using a Mark to Market (MTM) approach for fair-valued securities. Valuation adjustments on securities held at amortized cost calculated using a credit risk approach. Market risk estimated as a sensitivity analysis. - Other P&L components: Econometric models estimated for fees and commission income and other income/expenses. - Stress test horizon: - 3 years (2025–27) ### Banking Sector: Solvency Test — Scenarios (Tail shocks) - Two macroeconomic scenarios: - Baseline scenario based on the October 2024 WEO projections. - Adverse scenario consistent with the FSAP RAM: deepening geoeconomic fragmentation, greater protectionism, increased cross-border restrictions, impeded global trade (non-tariff and tariff barriers including “trade wars”), sharp de-integration of North American supply chains causing persistent supply shock, higher inflation expectations, central banks pausing or reversing rate cuts, lower commodity demand and oil prices, reduced FDI and technological diffusion, significant productivity decline, widespread risk-off event and asset valuation corrections, elevated borrowing rates, higher unemployment, reduced household income, sharp corrections in residential real estate and CRE. ### Banking Sector: Solvency Test — Risks, buffers, and behavioral assumptions - Positions/risk factors assessed: - Credit risk (provision costs): - Estimated according to Basel III framework. - Captures all on-balance sheet exposures at amortized cost by sector with different paths by sector. - Starting credit parameters used to project scenario-conditional forward paths. - Sovereign risk: - Mark-to-market valuation of sovereign securities from shocks to interest rates and credit spreads linked to macro scenario. - Market risk other than sovereign risk: - Reflected in valuation effects of FVTPL and FVOCI positions. - Profits: - Net interest income affected by change in reference rate and pass-through to asset-side and liability-side rates. - Net fee and commission income and other income/expense evolve with macro conditions and banks’ balance sheets. - Behavioral adjustments: - Balance sheet composition remains constant over stress test horizon. - No recognized interest on non-performing exposures. - Maturing assets replaced by exposures of the same type and risk. - Statutory tax rates. - DTIs can only accumulate capital through retained earnings. - If DTIs’ capital ratio falls below regulatory minimum during the stress test horizon, no prompt corrective action is assumed. - Dividend payout ratio set at the T0 level. If the capital conservation buffer is breached, restrictions on dividend distributions aligned with the regulatory framework. ### Banking Sector: Solvency Test — Regulatory calibration and reporting - Calibration of risk parameters: - Scenario dependent forward paths for Point in Time (PIT) PDs estimated for each exposure type. - For IRB exposures, RWAs projected on basis of updated regulatory through-the-cycle PDs and downturn LGDs, using appropriate scaling multipliers from PIT parameters. - For standardized approach (STA) exposures, RWAs projected based on constant risk weight densities. - Regulatory standards: - Baseline hurdles include the regulatory minimum, the Capital Conservation Buffer (CCoB), the D-SIB surcharge, the DSB, and the Pillar 2 buffer for the six D-SIBs. The DSB and the Pillar 2 buffer are not required for Desjardins. - In the adverse scenario, DTIs are allowed to deplete the CCoB and the DSB. Other Pillar 1 and Pillar 2 requirements remain in place. - Hurdle rates based on common equity tier-1, tier-1, and total capital ratios. - Reporting format for results: - Evolution of CET1, Tier 1, Capital Adequacy Ratio (CAR) for the seven systemic DTIs in aggregate. - Decomposition of key drivers to aggregate net profits and aggregate CET1 capital ratios, including differences between baseline and adverse scenarios. - Number of DTIs and share of total assets below hurdle rates. --- ### Banking Sector: Liquidity Test — Institutional perimeter and data - Institutions included: - Seven systemic DTIs, including Desjardins and six D-SIBs: Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, and National Bank of Canada. Royal Bank of Canada and Toronto-Dominion Bank are also considered G-SIBs. - Market share: - The six D-SIBs represent about 93.6 percent of banking sector assets (excluding foreign bank branches). - The seven systemic DTIs represent above 90.2 percent of DTIs’ assets. - Data and baseline date: - OSFI regulatory returns based on the LCR and NCCF for the 6 D-SIBs; AMF regulatory returns based on the LCR and the NCCF for Desjardins. - Scope of consolidation: Global consolidated group basis. - Cut-off date: end-October 2024 ### Banking Sector: Liquidity Test — Methodology and metrics - Methodology: - Two types of tests—LCR test and cash-flow analysis. - LCR test: - In line with the standard Basel monitoring tool, featuring total liquidity and liquidity in significant currencies (Canadian dollar, U.S. dollar, euro, British pound, and Japanese yen). - Scenarios for LCR outflows and HQLA haircuts used to produce stressed LCR ratios. - Stress test horizon: 30 days. - Cash-flow analysis: - Assesses DTIs' liquidity risk using cumulative net funding gap and counterbalancing capacity. - Net funding gap = difference between cash inflows and outflows in each time bucket summed across time buckets within a horizon. - Counterbalancing capacity = cumulative value of liquid assets that DTIs can liquidate under stress at reasonable prices (mainly cash resources and securities). - Liquidity shortfall arises when counterbalancing capacity insufficient to meet net funding gap. ### Banking Sector: Liquidity Test — Risks, scenarios, regulatory standards and reporting - Risks: - Funding liquidity risk reflected in funding run-off rates. - Market liquidity risk reflected in asset haircuts (market movements, potential fire sales, collateral supply considerations). - Behavioral adjustments: - Liquidity from the Bank of Canada’s ELA is not considered. - Scenario analysis: - LCR test: various scenarios with varying intensity of adverse liquidity conditions. - Cash-flow analysis: total of 20 scenarios from mild to severely adverse liquidity conditions, considering both funding and market liquidity risks. - Regulatory standards: - The LCR hurdle rate is set at 100 percent at the aggregate currency level (per Basel III). - Reporting format for results: - Changes in the system-wide liquidity position, including drivers for cash outflows, cash inflows, and counterbalancing capacity. - Distribution of DTIs’ liquidity positions. - Number of institutions with LCR below 100 percent and/or negative net cash balance. - Amount of liquidity shortfalls. --- ### Climate Risk Analysis and Stress Test - Institutional perimeter: 7 systemic DTIs (6 D-SIBs and Desjardins). - Data: - Physical risk: OSFI and AMF mortgage loan-level (RESL) data, September 2023. Fire weather data from Environment and Climate Change Canada (https://climatedata.ca/fire-weather/). Wildland Urban Interface from Natural Resources Canada (Johnston and Flannigan (2018)). - Transition risk: Moody’s Orbis for Balance Sheet and P&L NFC data, Moody’s CreditEdge data for NFC PDs, ICE for NFC emissions data. OSFI and AMF Rapid 2 data for NFC portfolios as of Q3 2024. - Methodology and risk drivers: - Physical risk: - Wildfire risks under historical climate and two IPCC climate scenarios (RCP4.5 and RCP8.5) to residential properties used as collateral for mortgages. - Micro-approach at census subdivision for the 6 D-SIBs and forward sortation level (3-digit postal code) for Desjardins. - Damages to residential properties from wildfires linked to banks’ LGDs. - Transition risk: - Credit risk from the impact of the transition to a low carbon economy—under current policies, Net Zero 2050 and Delayed transition scenarios—on nonfinancial firms’ balance sheets and income statements. - Micro-macro simulation model (the IMF ENVISAGE-FIBA Model Framework, Gross and others, forthcoming). --- ### Interconnectedness and Contagion Analysis - Institutions involved: - Confidential interbank exposure data: six D-SIBs and aggregate data for remaining banks (if available). - Public cross-sectoral and cross-border data: Statistics Canada’s financial accounts on a from-whom-to-whom basis. - Data and starting position: - Supervisory data: 2024: Q2 (or most recently available). - Methodology: - Contagion and interconnectedness Network Analysis: Espinosa-Vega Sole Model, 2010. - Risks: - Credit and funding losses related to bilateral exposures, and fire-sale of assets following sizeable withdrawals of deposits. - Cross-border exposures (data permitting). - Buffers: - Institution’s own capital and liquidity buffers, sector’s aggregate capital buffers. - Size of shocks: - Default of institutions. - Output/Presentation: - Network charts: Economy-wide and inter-financial network based on exposures. - Entity-level contagion/vulnerability/amplification indices. --- ### Household Sector Vulnerability Analysis - Objective: - Assess overall indebtedness in the household sector under FSAP baseline and adverse scenario. Project mortgage PD as input to banking sector stress test. - Data: - OSFI mortgage loan-level (RESL) data, Sept 2023 version, supplemented by recent aggregated Statistics Canada statistics. - Bank-level historical mortgage PD path shared by BOC. - Methodology: - Two-stage approach integrating structural simulation with a Bayesian econometric framework. - Stage 1: Structural Simulation: - (1) Baseline Initialization: Update household financial variables to reflect end-2024 conditions. - (2) Employment Status Simulation: Bootstrap approach to model employment evolution aligned with projected unemployment trends. - (3) Income and Debt Metrics Update: Adjust income based on employment status and wage growth, feeding into Debt Service Ratio (DSR). - (4) Aggregation: Repeat stochastic process across iterations, aggregating results into a debt-weighted PD estimate for projection horizon. - Stage 2: BMA Approach: - (1) DSR Anchoring: Aligns projected DSRs with end-2024 aggregate statistics from Statistics Canada. - (2) Econometric Estimation: By-bank panel BMA framework to refine PD projections by selecting relevant macro-financial predictors. - FSAP Systematic Risk workstream collaborates with Bank of Canada to refine Household Risk Assessment Model (HRAM) scenario and leverage BOC access to household survey data, credit bureau records and tax survey data; BOC’s PD path used as reference. --- ### Corporate Sector Vulnerability Analysis - Objective: - Quantify share of financially weak NFCs and assess corporate sector resilience; project PD at aggregate and industry level as input to banking sector stress test. - Data: - Firm-level balance sheet, income statement and credit data from Moody’s Orbis and Moody’s KMV expected default frequency. - Statistics Canada National Balance Sheet Account for aggregate NFC vulnerability indicators. - Overall and industry-level historical corporate PD shared by BOC. - Methodology: - Use Statistics Canada NBSA for headline corporate sector vulnerability indicators (debt-to-asset ratio, cash-to-debt ratio, debt-to-equity ratio). - Integrate Moody’s Orbis firm-level data and Moody’s KMV 1-year EDF focusing on leverage, profitability, and liquidity at aggregate and firm-size levels; identify financially weak firms and trends in firms-at-risk and debt-at-risk. - Conduct firm-level fixed effects regressions to analyze PD drivers, following IMF Japan FSAP (2024) approach. - Project PDs using historical corporate PDs provided by BOC and macro scenarios, applying BMA methods from Gross and Población (2019) at aggregate and industry levels. - Incorporate FactSet trends on publicly traded NFCs provided by authorities. - Address SME data limitations using supplementary information provided by authorities. --- ### Pension Funds: Solvency Stress Test — Perimeter, data and horizon - Institutional perimeter: - 7 Public sector pension plans (Ontario). - 33 Private sector single-employer and multi-employer pension plans (federal, Ontario). - Market share: - ~35 percent, based on assets. - Data: - Statutory returns. - Reference date: - June 30, 2024. - Time horizon: - 3 years ### Pension Funds: Methodology, scenarios, and risk factors - Methodology: - Investment assets: market value changes of assets after price shocks. - Liabilities: valuation change due to interest rate shock. - Impact measured on net assets (difference between stressed assets and liabilities) and funding ratios. - Adverse scenario (aligned with macrofinancial scenario, more granularity on market and interest rate risks): - Canadian stocks: -17.3 percent (year 1), -18.1 percent (year 2), +14.3 percent (year 3) - Canadian commercial real estate: -14.0 percent (year 1) -15.4 percent (year 2), +7.9 percent (year 3) - Canadian short-term risk-free interest rates: -33 bps (year 1), - 80 bps (year 2), -22 bps (year 3) - Canadian short-term risk-free interest rates: +114 bps (year 1), - 53 bps (year 2), -133 bps (year 3) - Canadian sovereign bond spreads: +25 bps (year 1), +30 bps (year 2), -39 bps (year 3) - Corporate bond spreads: - Between +20 bps for AAA-rated and +101 bps for BB and lower (year 1) - Between +25 bps for AAA-rated and +124 bps for BB and lower (year 2) - Between -32 bps for AAA-rated and -158 bps for BB and lower (year 3) - Canadian dollar (external value): -4.7 percent (year 1), - 4.0 percent (year 2), +3.1 percent (year 3) - Sensitivity analysis: - Instantaneous market risk shocks: - Stock price decline: -40 percent for ordinary shares, -20 percent for preferred shares - CAD appreciation: +10 percent - Risk factors assessed: - Market risks (equity, property, FX, alternative assets) - Interest rate risks - Credit risks (sovereign and corporate bond spreads) - Regulatory/accounting standards: - Canadian Accounting Standards for Pension Plans (ASPP) *Source: Appendix I. Stress Test Matrix (STeM), 1canea2025001-source-pdf* ### 6. Reporting formats for ### 6. Reporting formats for results ### Pension Funds: Liquidity Risk — Bottom-up - Institutional Perimeter - Number of institutions: 10 Public sector pension plans (Ontario, British Columbia, federal, jointly federal-provincial) - Number of institutions: 9 Private sector single-employer pension plans (federal) - Market Share: ~70 percent, based on assets - Data: Data collection from participating pension plans - Reference Date: 30 June 2024 - Channels of Risk propagation - Methodology: Combination of interest rate and FX shocks leading to margin calls on pension plans’ derivative and other off-balance sheet positions - Time horizon: Up to three days - Scenario Analysis: Tail shocks - Instantaneous increase of interest rates (short-term +150 basis points, long-term +50 basis points; for all currencies) and a CAD depreciation (-2.9 percent against USD, and -4.8 percent against EUR) - Risk factors assessed - Short-term liquidity risks - Regulatory/accounting standards - Canadian ASPP - Reporting Formats for results — Output presentation - Change in values of assets and liabilities - Funding ratios - Contribution of individual shocks - Amount of margin call (per day) - Share of margin calls which could be met in kind - Liquid assets - Sources of liquidity to meet margin calls ### Insurers: Solvency Stress Test — Top-down - Institutional Perimeter - Number of institutions: ~9 life insurers - Number of institutions: ~17 P&C insurers - Number of institutions: 3 mortgage insurers - Market Share: Life: ~94 percent, based on balance sheet assets - Market Share: P&C: ~57 percent, based on gross premiums - Market Share: Mortgage: 100 percent, based on gross premiums - Consolidation level: Unconsolidated - Data: Statutory returns - Reference Date: June 30, 2024 - Channels of Risk propagation - Methodology: - Investment assets: market value changes of assets after price shocks; - Liabilities: valuation change due to interest rate shock; - Impact on available capital (net assets as the difference between stressed assets and liabilities). - For mortgage insurers: higher claims through heightened defaults on insured mortgage loans - Time horizon: 3 years - Scenario Analysis: Tail shocks (Adverse scenario: aligned with the macrofinancial scenario, but with more granularity on market and interest rate risks) - Canadian stocks: -17.3 percent (year 1), -18.1 percent (year 2), +14.3 percent (year 3) - Canadian commercial real estate: -14.0 percent (year 1) -15.4 percent (year 2), +7.9 percent (year 3) - Canadian short-term risk-free interest rates: -33 bps (year 1), -80 bps (year 2), -22 bps (year 3) - Canadian short-term risk-free interest rates: +114 bps (year 1), -53 bps (year 2), -133 bps (year 3) - Canadian sovereign bond spreads: +25 bps (year 1), +30 bps (year 2), -39 bps (year 3) - Corporate bond spreads: between +20 bps for AAA-rated and +101 bps for BB and lower (year 1), between +25 bps for AAA-rated and +124 bps for BB and lower (year 2), between -32 bps for AAA-rated and -158 bps for BB and lower (year 3) - Canadian dollar (external value): -4.7 percent (year 1), -4.0 percent (year 2), +3.1 percent (year 3) - Sensitivity analysis: Instantaneous market risk shocks - Stock price decline: -40 percent for ordinary shares, -20 percent for preferred shares - CAD appreciation: +10 percent - Risk factors assessed - Market risks (equity, property, FX, alternative assets) - Interest rate risks - Credit risks (sovereign and corporate bond spreads) - For mortgage insurers: credit risks from underwriting business - Regulatory/accounting standards - IFRS 17 - Reporting Formats for results — Output presentation - Change in valuation of assets and liabilities - Solvency ratios; - Aggregated capital shortfall (where applicable); - Dispersion across companies; - Contribution of individual shocks. ### Insurers: Liquidity Stress Test — Bottom-up - Institutional perimeter - Number of institutions: 3 life insurers - Market share: Life: ~85 percent, based on balance sheet assets - Consolidation level: Unconsolidated - Data: Data collection from participating life insurers - Reference date: June 30, 2024 - Channels of risk propagation - Methodology: Combination of interest rate and FX shocks leading to margin calls on insurers’ derivative and other off-balance sheet positions - Time horizon: Up to three days - Scenario analysis: Tail shocks - Instantaneous increase of interest rates (short-term +150 basis points, long-term +50 basis points; for all currencies) and a CAD depreciation (-2.9 percent against USD, and -4.8 percent against EUR) - Risk factors assessed - Short-term liquidity risks - Regulatory/accounting standards - IFRS 17 - Reporting Formats for results — Output presentation - Amount of margin call (per day) - Share of margin calls which could be met in kind - Liquid assets - Sources of liquidity to meet margin calls *Source: 1canea2025001-source-pdf - 6. Reporting formats for results (Reference Date entries as provided in the source).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1canea2025001-source-pdf.pdf_