Featured Product

    IMF Publishes Reports Assessing Financial System Stability in Canada

    June 24, 2019

    IMF published a report on results of the Financial System Stability Assessment (FSSA) on Canada. Also published were the staff report and the selected issues report under the 2018 Article IV consultation with Canada. The FSSA report highlights that performance of the financial system has been strong and the country has strong financial links with the United States. The banking sector has enjoyed solid profitability and sizable capital buffers while the insurance sector has remained financially sound, even in a low interest rate environment. Other non-bank sectors have grown considerably, with pension funds and mutual funds dominating the institutional and retail asset management landscape. Overall, major banks, life insurers, and pension funds have expanded their footprints abroad.

    The FSSA report reveals that the financial system would be able to manage severe macro-financial shocks, but mortgage insurers would probably need additional capital. Even in a severe adverse scenario, major deposit-taking institutions would be able to rebuild their capital positions to meet the regulatory requirements. However, large life insurers appear somewhat exposed to financial market stress and lower interest rates. While the overall capital buffers of banks are adequate, lender risk-weights for mortgage exposures should be higher. Mortgage insurers’ capital requirements should also be tightened. In addition to properly accounting for through-the-cycle credit risk, these measures can help improve mortgage risk-pricing and limit procyclical effects of falling house prices.

    The key vulnerabilities stem from banks’ external foreign-currency funding; extensive use of derivatives; rising risk-taking by life insurers, pension funds, and other non-banks; non-prime mortgage lending; and potential spillovers from overseas operations and cross-border exposures. Furthermore, continued efforts to address data gaps are essential to support more effective risk monitoring and analysis. Financial sector oversight is high quality, but there are important areas for improvement. Cooperation between federal and provincial authorities should be further improved, supported by additional memorandums of understanding (MoUs). The roles and responsibilities of the authorities that oversee financial market infrastructures should be further clarified. Given the macro-financial vulnerabilities, the regulatory and supervisory frameworks of deposit-taking institutions regarding credit risk related to real estate exposures should be strengthened, as per the assessment. The bank resolution regimes and deposit insurance systems for federal and Québec jurisdictions are generally aligned with international best practices.

    Another recommendation is that the recovery and resolution planning, which is advanced for major deposit-taking institutions, should be expanded. Given the likelihood of compensation to bail-in-able debt holders, the valuation framework should be further developed to increase certainty about bail-in outcomes. The framework of the Bank of Canada for managing liquidity during stress is well-defined. Modernization of the financial stability architecture would help enhance systemic risk oversight and crisis preparedness. A single body in charge of systemic risk oversight would be the first-best solution. Second-best solutions include formalizing and strengthening the leading role of the Bank of Canada in systemic risk surveillance and creating a federal-provincial platform to discuss systemic risk issues and to formulate policy responses. 

    The staff report highlighted that the macro-prudential measures have mitigated housing-related risks to financial stability. The IMF Directors welcomed the assessment that the overall financial system is healthy and resilient. They also noted that the informal framework for systemic risk surveillance and crisis management has served Canada well. While acknowledging that there is no one-size-fits-all solution, the Directors encouraged continued efforts to modernize the arrangement and strengthen micro-prudential oversight and safety nets along the lines of the Financial Sector Assessment Program (FSAP) recommendations.

     

    Related Links

    Keywords: Americas, Canada, Banking, Insurance, Securities, Pensions, FSSA, FSAP, Article IV, Systemic Risk, Macro-Prudential Policy, FMI, Bank of Canada, IMF

    Featured Experts
    Related Articles
    News

    APRA Issues Interim Update to Policy Priorities for 2021 and Beyond

    In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.

    September 24, 2021 WebPage Regulatory News
    News

    EC Adopts Solvency II and Resolution Rules Package for Insurers

    The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.

    September 22, 2021 WebPage Regulatory News
    News

    OCC Issues Booklets on Regulatory Reporting and Earnings

    The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.

    September 22, 2021 WebPage Regulatory News
    News

    ECB Sets Out Results of Economy-Wide Climate Stress Tests

    The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.

    September 22, 2021 WebPage Regulatory News
    News

    EBA Examines Implications of Increasing Use of Digital Platforms in EU

    The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.

    September 21, 2021 WebPage Regulatory News
    News

    HKMA Issues Updates on Policy Measures Intended to Ease COVID Impact

    The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.

    September 21, 2021 WebPage Regulatory News
    News

    ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures

    The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.

    September 21, 2021 WebPage Regulatory News
    News

    BIS Quarterly Review Discusses Developments in Fintech and ESG Space

    BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.

    September 20, 2021 WebPage Regulatory News
    News

    BCBS to Consult on Supervisory Practices for Climate Risks by Year-End

    The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards

    September 20, 2021 WebPage Regulatory News
    News

    OCC Identifies Operational Risk Deficiencies in MUFG Union Bank

    The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.

    September 20, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7494