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

    ESAs Issue Multiple Regulatory Updates for Financial Sector Entities

    The three European Supervisory Authorities (ESAs) issued a letter to inform about delay in the Sustainable Finance Disclosure Regulation (SFDR) mandate, along with a Call for Evidence on greenwashing practices.

    November 15, 2022 WebPage Regulatory News
    News

    ISSB Makes Announcements at COP27; IASB to Propose IFRS 9 Amendments

    The International Sustainability Standards Board (ISSB) of the IFRS Foundations made several announcements at COP27 and with respect to its work on the sustainability standards.

    November 10, 2022 WebPage Regulatory News
    News

    IOSCO Prioritizes Green Disclosures, Greenwashing, and Carbon Markets

    The International Organization for Securities Commissions (IOSCO), at COP27, outlined the regulatory priorities for sustainability disclosures, mitigation of greenwashing, and promotion of integrity in carbon markets.

    November 09, 2022 WebPage Regulatory News
    News

    EBA Finalizes Methodology for Stress Tests, Issues Other Updates

    The European Banking Authority (EBA) issued a statement in the context of COP27, clarified the operationalization of intermediate EU parent undertakings (IPUs) of third-country groups

    November 09, 2022 WebPage Regulatory News
    News

    OSFI Sets Out Work Priorities and Reporting Updates for Banks

    The Office of the Superintendent of Financial Institutions (OSFI) published an annual report on its activities, a report on forward-looking work.

    November 07, 2022 WebPage Regulatory News
    News

    APRA Finalizes Changes to Capital Framework, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) finalized amendments to the capital framework, announced a review of the prudential framework for groups.

    November 03, 2022 WebPage Regulatory News
    News

    BIS Hub and Central Banks Conduct CBDC and DeFI Pilots

    The Bank for International Settlements (BIS) Innovation Hubs and several central banks are working together on various central bank digital currency (CBDC) pilots.

    November 03, 2022 WebPage Regulatory News
    News

    FASB Proposes Improvements to 2023 GAAP Reporting Taxonomy

    The Financial Accounting Standards Board (FASB) is seeking comments, until November 03, 2022, on the proposed technical and other conforming improvements for the 2023 GAAP Financial Reporting Taxonomy.

    November 03, 2022 WebPage Regulatory News
    News

    ECB Sets Deadline for Banks to Meet Its Climate Risk Expectations

    The European Central Bank (ECB) published the results of its thematic review, which shows that banks are still far from adequately managing climate and environmental risks.

    November 02, 2022 WebPage Regulatory News
    News

    ESAs, ECB, & EC Issue Multiple Regulatory Updates for Financial Sector

    Among its recent publications, the European Banking Authority (EBA) published the final standards and guidelines on interest rate risk arising from non-trading book activities (IRRBB)

    October 31, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8588