Country Reports
2020
January 24, 2020
Canada: Financial Sector Assessment Program-Technical Note-Housing Finance
Description: This Technical Note on Financial Safety Net and Crisis Management for the Canada focuses on housing finance. Housing finance is broadly resilient, but pockets of vulnerabilities exist. Mortgage finance is dominated by domestic systemically important financial institutions (D-SIFIs) and supported by the government via mortgage insurance, securitization guarantees, and other policies. With a market share of about 70 percent, D-SIFIs focus on prime borrowers, and their lending is backed by their strong balance sheets. The cost of prime mortgage financing is low and little differentiated, with credit risk being under-priced in some segments. Aspects of Canada’s mortgage finance may amplify procyclical effects of falling house prices during severe downturns. Core lenders focus on low-risk mortgage lending. In response to deteriorating household debt-servicing capacity, they may constrain new lending or renewals of maturing uninsured mortgages, potentially adding pressures on the housing market. Alternatively, a sudden adoption of risk-based pricing to accommodate financially weak borrowers might amplify household debt servicing fragility.
January 24, 2020
Canada: Financial Sector Assessment Program-Technical Note-Stress Testing and Financial Stability Analysis
Description: This paper on Financial Safety Net and Crisis Management for the Canada reviews the stress testing and financial stability analysis. The paper highlights that the financial system’s performance has been strong. The insurance sector has remained financially sound even in the low interest rate environment. Major banks, life insurers, and pension funds have expanded their footprints abroad. Canada has strong financial linkages with the United States. Macrofinancial vulnerabilities—notably, elevated household indebtedness and housing market imbalances—remain substantial, posing financial stability concerns. Major deposit-taking institutions would be able to manage severe macrofinancial shocks; however, mortgage insurers would probably need additional capital. Major deposit-taking institutions also hold enough liquidity buffers to withstand sizeable funding outflows. However, increased balance sheet complexity and reliance on wholesale and foreign exchange funding, and the extensive use of derivatives are some areas of concern that would warrant closer monitoring by the competent authorities and a more comprehensive quality assurance in the context of supervisory or macroprudential stress testing exercise.
January 24, 2020
Canada: Financial Sector Assessment Program-Technical Note-Systemic Risk Oversight and Macroprudential Policy
Description: This Technical Note provides a summary of the review of systemic risk oversight arrangements and macroprudential policy issues in Canada. The paper discusses the existing systemic risk oversight arrangements and potential challenges, and then presents steps that can be taken to modernize the framework to ensure its effectiveness going forward. The paper focuses on systemic risk surveillance, including the current approaches and existing challenges such as data gaps and coordination. It also covers macroprudential policy issues, including the toolkit, the current policy stance and overall policy effectiveness. The review recommends that steps can be taken to improve the current system with a more formalized arrangement for systemic risk oversight. A single body in charge of systemic risk oversight would be the first-best option. Over time, the authorities should review whether systemic risk oversight under the Heads of Agencies Committee leadership with no statutory mandate is adequate. Macroprudential policy at the federal level has been effective; however, better coordination is essential given multiple provincial authorities’ ownership of prudential tools.
January 24, 2020
Canada: Financial Sector Assessment Program-Technical Note-Oversight of Financial Market Infrastructures and Fintech Development
Description: This paper reviews assessment of financial market infrastructures (FMIs) and authorities’ responsibilities in Canada. The report shows that the FMIs have operated normally under a well-established legal and oversight framework that is distinct for Canada. The Bank of Canada (BOC) has issued a Guideline that defines the criteria for identifying FMIs. Recognition of a clearing agency is also required under provincial securities legislation where terms and conditions and the clearing rule would apply. The current oversight approach can benefit from stronger enforcement powers available to the BOC. Provincial securities regulators are encouraged to train FMI oversight staff in advanced quantitative skills to support risk assessment. Further enhancement in managing liquidity and operational risks will help ensure the robust functioning of FMIs. Improvements in cyber resiliency continue in line with international guidance, including industry-wide exercises carried out by FMI operators and participants. However, compliance to endpoint security needs to be tightened by self-attestations and audits of FMI participants. The categorization and reporting of operational incident severity levels could be further coordinated.
January 24, 2020
Canada: Financial Sector Assessment Program-Technical Note-Bank Resolution and Crisis Management
Description: This Technical Note on Financial Safety Net and Crisis Management for the Canada presents the findings and recommendations made in the Financial Sector Assessment Program for Canada in the areas of bank resolution and crisis management. The note is based on the findings of the mission conducted during October 29–November 14, 2018. The note highlights that Canada has maintained financial stability for a long period of time. Strong institutional settings, effective supervision, and sound financial sector policies have succeeded in preventing crisis situations. The last bank failure in Canada occurred more than twenty years ago. However, the lack of crisis events does not diminish the need for preparation and for revisions to the existing framework. A substantial part of the financial system is covered by federal crisis management and safety net arrangements that are well-established. Coordination among the federal agencies is strong, underpinned by inter-agency committees. The note recommends that the ongoing work of the authorities in completing and enhancing their contingency plans and implementing testing and readiness programs should be continued.
January 24, 2020
Canada: Financial Sector Assessment Program-Technical Note-Deposit-taking Sector: Regulation and Supervision
Description: The Technical Note focuses on sizeable mortgage exposures and persistent housing market imbalances. The review evaluated oversight of deposit-taking institutions (DTIs) in federal jurisdiction, as well as in British Columbia and Québec. There are many good, well-functioning mechanisms in place for cooperation. Areas that warrant improvement about DTI regulation and supervision include policy development, especially between Office of the Superintendent of Financial Institutions (OSFI) and Autorité des marchés financiers, coordination of data collection, and exchange of useful prudential information between different agencies. The authorities should explore how to remove barriers that prevent close and meaningful cooperation. Risk weights on mortgage lending appear too low for insured mortgages and may not be sufficiently through-the-cycle for banks using the Internal Ratings Based approach. A common forbearance definition and monitoring framework for credit risk (in the context of loan restructuring by DTIs should be adopted across all jurisdictions in Canada. A similar definition, in line with the guidance of the Basel Committee for Banking Supervision, and consistent data will help improve risk monitoring especially given the importance of debt restructuring for managing problem real estate exposures. Finally, OSFI’s guideline on asset pledging should ensure enough unencumbered assets to support the claim of depositors.
January 24, 2020
Canada: Financial Sector Assessment Program-Technical Note-Systemic Liquidity
Description: This Technical Note on Financial Safety Net and Crisis Management for the Canada examines systematic liquidity issues. The review evaluated the Bank of Canada’s (BOC’s) operational framework and its ability to manage liquidity conditions in normal times and in times of stress. The review also assessed the functioning and resilience of key funding markets in Canada. The paper highlights that the BOC’s framework for market operations and liquidity provision in normal times is comprehensive and well-articulated. System-wide liquidity conditions are stable, market rates are closely aligned with the announced policy rate, and the BOC has many channels to provide liquidity against a broad range of collateral. Foreign exchange markets appear liquid, and their resilience is increasingly important given the growing reliance on external, foreign-currency funding. Contingency plans for market-wide liquidity support regarding intervention in securities markets and provision of foreign-currency liquidity should be developed further and tested.
January 23, 2020
Republic of Uzbekistan: Technical Assistance Report-Monetary and Financial Statistics Mission (July 17-August 2, 2019)
Description: This technical assistance report on the Republic of Uzbekistan states that the mission achieved all its objectives and Uzbekistan’s country page is now ready to be introduced in International Financial Statistics. Uzbekistan has recently intensified its efforts to improve its financial sector statistics. With the ongoing liberalization of the Uzbek economy, availability of granular data for an assessment of risks related to the financial sector is becoming more important. Uzbekistan reports 11 core and one additional financial soundness indicators (FSI) for deposit takers on a quarterly basis for publication on the IMF’s website. The one important improvement needed, particularly for the other depository corporation survey, is the enhancement of the counterparty sector classifications. The mission also assisted the Central Bank of Uzbekistan in establishing an initial framework for the compilation of a quarterly other financial corporation survey using the Standardized Report form 4SR. The Prudential Supervision Department is now ready to report all core and additional FSIs for deposit takers (DT), as well as their underlying financial statements, with the reporting frequency to be increased from quarterly to monthly. In order to support progress in the several areas, the mission recommended a detailed action plan with the priority recommendations summarized.
January 22, 2020
Republic of Estonia: Selected Issues
Description: This Selected Issues paper on Estonia examines impact of assessing competitiveness and exposure to shocks integrating global value chains (GVCs). This paper strengthens the analytical underpinnings of competitiveness assessments and exposure to shocks by incorporating GVCs. Standard real effective exchange rates (REER) indexes assume trade is only in final goods. However, like most European economies, Estonia is highly integrated into GVCs. This implies that assessments of competitiveness should consider trade in value added. Based on a structural model, the paper assesses competitiveness and exposure to trade shocks accounting for the GVC participation in Estonia. The analysis using a REER index considering the GVC architecture suggests potential competitiveness problems in Estonia. The paper also estimates the impact of overvaluation (and appreciation) of the GVC related REER measure on value added export and real GDP growth and finds observable effects. Further, trade tension induced tariff hikes may have important costs for value added produced in Estonia.
January 22, 2020
Republic of Estonia: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Republic of Estonia
Description: This 2019 Article IV Consultation with Estonia discusses that the outlook is favorable for the near term, however, for slower economic activity for the medium term. Th economy has performed well in recent years, supported by prudent management and effective structural reforms. Growth remains strong and unemployment is at a record low. Inflation is above the euro-area average, consistent with Estonia’s convergence process. Wages are rising, reflecting a tight labor market and skill shortages at the high end of the labor market. Absent reforms to boost productivity and manage demographic challenges, however, growth will slow notably. The authorities need to guard against potential overheating in the near term while taking advantage of sizable fiscal buffers in the medium term to support innovation and labor supply and reduce inequality. The report recommends that it is imperative to consider changes that preserve the pension system’s viability and sustainability, while promoting policies that address inequality. This includes raising female labor participation through broader implementation of gender pay transparency and flexible childcare arrangements.