Front Matter Page
IMF Country Report No. 14/69
CANADA
FINANCIAL SECTOR ASSESSMENT PROGRAM
STRESS TESTING—TECHNICAL NOTE
March 2014
This Technical Note on Stress Testing on Canada was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed in February 2014.
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Front Matter Page
CANADA
FINANCIAL SECTOR ASSESSMENT PROGRAM
TECHNICAL NOTE ON STRESS TESTING
February 2014
Prepared By
Monetary and Capital Markets Department
This Technical Note was prepared by IMF staff in the context of the Financial Sector Assessment Program in Canada. It contains technical analysis and detailed information underpinning the FSAP’s findings and recommendations.
Contents
Glossary
INTRODUCTION AND OVERVIEW
A. Overview of Stress Tests
SCENARIOS
BANKING SECTOR—SOLVENCY STRESS TESTS
A. Bottom-up Stress Test
B. IMF Top-down Stress Test
C. OSFI Top-down Stress Test
D. Reconciliation of Results
E. Recommendations and Policy Implications
BANKING SECTOR—LIQUIDITY AND FUNDING STRESS TESTS—INDIVIDUAL AND NETWORK EFFECTS
A. Recommendations and Policy Implications
LIFE INSURANCE SECTOR—SOLVENCY STRESS TEST
CMHC SOLVENCY STRESS TEST
References
TABLES
1. Stress Testing Recommendations
2. Regulatory and Supervisory Capital Requirements
3. Mapping Economic Sectors from the BU into Economic Sectors Used in BoC Estimation of PDs
4. Capital Conservation Rule for Dividends Distribution
5. IRBBB Spreads Under the Stress-test Scenario
6. Trading Book Risk Parameters Under the Stress-test Scenario
7. Mapping Basel II Asset Classes and Exposures by Economic Sectors into New Basel II Asset Classes
8. Dividends Distribution Schedule
9. Main Differences Between Different Approaches
10. FSIs: Big 6 versus the Rest of the Banking System
11. Summary of Banks’ Stress Testing Results
12. Liquid and Illiquid Assets of the BSL Metric—Haircuts Calibration
13. Outflows of BSL Metric—Run-off Rates Calibration
14. Stress Test Matrix (STeM): Solvency and Liquidity Risks and Network Effects
FIGURES
1. IMF Top Down Approach
2. Geographical and Sectoral Distribution of Losses and Exposures
3. IMF TD Solvency Stress Test Results—Sensitivity Analysis
4. Macro-financial Risk Assessment Framework (MFRAF) of the BoC
5. MFRAF Modules
6. MFRAF Modulus Timing
7. The BoC Liquidity and Network Stress Test Results, Baseline Scenario
8. Aggregate Loss Distributions, Baseline Scenario
9. The BoC Liquidity and Network Stress Test Results, Adverse Scenario
10. Aggregate Loss Distributions, Adverse Scenario
11. Total MCCSR Ratio in Baseline and Adverse Scenario
12. Total Tier 1 Ratio in Baseline and Adverse Scenario
13. Net Income in Baseline and Adverse Scenario
14. Contribution to MCCSR Deviation from Baseline
15. Developments in Banking Sector
16. Scenarios—Canada, Main Variables
17. Scenarios—US, Euro Area, Other, Main Variables
18. IMF Top Down Model of Income Statement—Interest Income
19. IMF Top Down Model of Income Statement—Interest Expense
20. IMF Top Down Model of Income Statement—Trading Income
21. IMF Top Down Model of Income Statement—Non-interest Income
22. IMF Top Down Model of Income Statement—Non-interest Expense
23. IMF Top Down Assumptions—Loans, Deposits
24. IMF Top Down Assumptions—Loans, Balance Sheet
25. Solvency Stress Test Results
26. Drivers of Stress Test Results—Contributions to CET1 Change
27. Drivers of Stress Test Results—Contributions to Net Income
28. Net Income and RWAs—Comparison
29. Net Income and RWAs—Comparison
30. Parameters of RWAs and Expected Losses—Comparison
31. Recapitalization Needs—as Percent in gross income
BOX
1. OSFI Algorithm to Project Loan Book
ANNEX
I. Statistical Annex
Glossary
| AFS |
Available for Sale |
| Big Six Banks |
RBC, TD, BNS, CIBC, BMO, NBC |
| BoC |
Bank of Canada |
| BSL |
Balance-sheet liquidity |
| BMO |
Bank of Montreal |
| BNS |
Bank of Nova Scotia |
| BU |
Bottom-up |
| CEM |
Current exposure method |
| CET1 |
Common equity tier 1 |
| CCB |
Capital conservation buffer |
| CCP |
Central counter party |
| CMHC |
Canada Mortgage and Housing Corporation |
| CVA |
Credit Valuation Adjustment |
| CIBC |
Canadian Imperial Bank of Commerce |
| D-SIB |
Domestic Systemically Important Bank |
| HQLA |
High Quality Liquid Assets |
| IRB |
Internal Ratings-based |
| IRC |
Incremental Risk Charge |
| LCR |
Liquidity Coverage Ratio |
| LGD |
Loss Given Default |
| MCCSR |
Minimum Continuing Capital and Surplus Requirement |
| MCT |
Minimum Capital Test |
| MFRAF |
Macro-financial Risk Assessment Framework |
| NBC |
National Bank of Canada |
| NCCF |
Net Cumulative Cash Flow |
| NSFR |
Net Stable Funding Ratio |
| OSFI |
Office of the Superintendent of Financial Institutions |
| OTC |
Over-the-counter |
| PD |
Probability of Default |
| PIT |
Point-in-Time |
| RBC |
Royal Bank of Canada |
| RWAs |
Risk Weighted Assets |
| ToD |
Top-down |
| TD |
Toronto Dominion Bank |
| TSX |
Toronto Stock Exchange |
| TTC |
Through-the-Cycle |