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.
Keywords: Americas, Canada, Banking, Insurance, Securities, Pensions, FSSA, FSAP, Article IV, Systemic Risk, Macro-Prudential Policy, FMI, Bank of Canada, IMF
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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