Canada: Financial Sector Assessment Program-Technical Note-Stress Testing and Financial Stability Analysis
IMF Staff Country Reports, January 24, 2020
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Bibliographic details
- Published: January 24, 2020
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781513527116.002
Overview and purpose
- Reviews stress testing and financial stability analysis for Canada.
- Highlights that the financial system’s performance has been strong.
- Notes strong financial linkages with the United States.
- Identifies macrofinancial vulnerabilities—“notably, elevated household indebtedness and housing market imbalances”—as substantial financial stability concerns.
Key findings from stress testing and sector analysis
- The insurance sector has remained financially sound even in the low interest rate environment.
- Major banks, life insurers, and pension funds have expanded their footprints abroad.
- Major deposit-taking institutions would be able to manage severe macrofinancial shocks.
- Mortgage insurers would probably need additional capital.
- Major deposit-taking institutions hold enough liquidity buffers to withstand sizeable funding outflows.
Risks and vulnerabilities requiring attention
- Increased balance sheet complexity.
- Reliance on wholesale and foreign exchange funding.
- Extensive use of derivatives.
- These areas “would warrant closer monitoring by the competent authorities and a more comprehensive quality assurance in the context of supervisory or macroprudential stress testing exercise.”
Policy implications and recommended supervisory actions (as stated)
- Closer monitoring by competent authorities of:
- balance sheet complexity;
- reliance on wholesale and foreign exchange funding;
- extensive use of derivatives.
- More comprehensive quality assurance in supervisory or macroprudential stress testing exercises to address the identified concerns.
- Recognition that mortgage insurers would likely need additional capital under severe macrofinancial shocks.
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