Mostly Economics

Canada has a long history of financial/banking stability compared to most other nations.

In this recent speech, Carolina Wilkins, DG at Bank of Canada  points how the system will remain stable despite the worst possible adverse shocks:

Canadian banks are part of a global banking system that is more solid than it was a decade ago. Globally active banks are holding over US$2 trillion more capital than they were at the beginning of 2011, when the phase-in of the post-crisis reforms began. This translates to a 7-percentage point increase in their Tier 1 capital ratio.11  The leverage limits and new liquidity regulations also make these banks more resilient.12

Canada has implemented new measures to further strengthen our banking system. For example, Canada’s prudential regulator, the Office of the Superintendent of Financial Institutions (OSFI), increased the required amount of capital that Canada’s big banks have to hold to protect themselves against financial-system vulnerabilities. Canada introduced a bail-in regime to ensure that investors—not taxpayers—would take the brunt of the financial burden in the unlikely event that a big bank were to fail. Also, OSFI asked many smaller, single-business-line banks to reduce their reliance on short-term brokered funding, which can be flightier in stressful situations.

The Bank of Canada, along with OSFI, evaluates these safeguards by conducting stress tests on the major banks. Given that the idea is to plan for the worst, it’s important to study extreme scenarios. The most recent test was in the context of the International Monetary Fund (IMF)’s Financial System Stability Assessment of Canada, published in June.13 

The scenario used was worse than anything seen in Canada in recent decades. There’s a recession that lasts two years, the unemployment rate increases by 6 percentage points, and house prices fall by 40 percent.14 Clearly this would be very difficult for people if it were to materialize. That said, this test found that our banks could withstand even this kind of severe, system-wide shock. This says to me that efforts to increase resilience in the banking system have been worthwhile, because they would help prevent a bad situation from becoming even worse.

Hmm…