Maarten van Oordt is a Research Advisor in the Currency Department of the Bank of Canada. His work focuses on digital currency, financial institutions and risk management. Before joining Currency, Maarten worked as a Senior Analyst in the Financial Stability Department of the Bank of Canada, and as an economist in the Economics and Research Division of De Nederlandsche Bank (Dutch Central Bank). He received his PhD from Erasmus University Rotterdam on the topic “On Extreme Events in Banking and Finance.” His research has been published in academic journals such as the Journal of Financial Intermediation and the Journal of Financial and Quantitative Analysis.
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.
We use models to better understand and assess how risks could affect the financial system. In our hypothetical scenario, a house price correction and elevated financial stress weigh on the economy. An increased number of households and businesses have difficulty repaying loans. Nonetheless, the large banks remain resilient.
The present paper shows that, everything else equal, some transactions to transfer portfolio credit risk to third-party investors increase the insolvency risk of banks. This is particularly likely if a bank sells the senior tranche and retains a sufficiently large first-loss position.
The Bank’s internal credit risk assessment abilities are regularly enhanced. In this note, we present a recent innovation that extends the set of market-based indicators used in the credit risk assessment of financial counterparties.