Cameron MacDonald is a Principal Economist in the Financial Stability Department at the Bank of Canada. He is involved in the assessment of risks and vulnerabilities associated with financial institutions such as banks and life insurers. Other interests include stress testing, macroprudential policy, and mortgage finance. He holds an MA in economics from the University of Toronto.
Staff Analytical Notes
The stability of the Canadian financial system, as well as its ability to support the Canadian economy, depends on the ability of financial institutions to absorb and manage major shocks. This is especially true for large banks, which perform services essential to the Canadian economy.
We use a suite of risk-assessment models to examine the possible impact of a hypothetical house price correction, centred in the Toronto and Vancouver areas. We also assume financial stress significantly amplifies the macroeconomic impact of the house price decline.
In this note, we explore two types of risk faced by holders of mortgages and home equity lines of credit (HELOCs) in the context of rising interest rates: interest rate risk and renewal risk.
This note introduces several market-based indicators and examines how they can further inform the Bank of Canada’s vulnerability assessment of Canadian financial institutions. Market-based indicators of leverage suggest that the solvency risk for major Canadian banks has increased since the beginning of the oil-price correction in the second half of 2014.