January 15, 2024 Mapping out the implications of climate transition risk for the financial system Gabriel Bruneau, Javier Ojea Ferreiro, Andrew Plummer, Marie-Christine Tremblay, Aidan Witts We develop a new analytical framework to understand the system-wide implications of climate transition risk. When applying this framework to Canadian data, we find that interconnections within the financial sector could amplify the direct effects of climate transition risk on financial entities. Content Type(s): Publications, Financial System Hub articles Topic(s): Climate change, Economic models, Financial institutions, Financial markets, Financial stability JEL Code(s): C, C6, C63, G, G0, G01, G1, G10, G2, G20, Q, Q5, Q54
January 15, 2024 Flood risk and residential lending Craig Johnston, Geneviève Vallée, Hossein Hosseini, Miguel Molico, Marie-Christine Tremblay, Aidan Witts We present key findings of a recent study that evaluates the credit risk that flooding poses to the residential lending activities of Canadian banks and credit unions. Results show that such risk currently appears modest but could become larger with climate change. Content Type(s): Publications, Financial System Hub articles Topic(s): Central bank research, Climate change, Credit risk management, Econometric and statistical methods, Financial institutions, Financial stability JEL Code(s): C, C8, C81, G, G2, G21, Q, Q5, Q54
Extreme Weather and Low-Income Household Finance: Evidence from Payday Loans Staff Working Paper 2024-1 Shihan Xie, Victoria Wenxin Xie, Xu Zhang This paper explores the impact of extreme weather exposures on the financial outcomes of low-income households. Our findings highlight the heightened financial vulnerability of low-income households to environmental shocks and underscore the need for targeted policies. Content Type(s): Staff research, Staff working papers Topic(s): Climate change, Credit and credit aggregates JEL Code(s): G, G5, Q, Q5, Q54
Modelling Canadian mortgage debt and payments in a semi-structural model Staff Analytical Note 2024-1 Fares Bounajm, Austin McWhirter We show how Canadian mortgage debt dynamics can be modelled in a semi-structural macroeconomic model, such as the Bank of Canada’s LENS. The model we propose accounts for Canada’s unique mortgage debt structure. Content Type(s): Staff research, Staff analytical notes Topic(s): Economic models, Monetary policy transmission JEL Code(s): E, E2, E27, E4, E43, E47, G, G5, G51
Procyclicality in Central Counterparty Margin Models: A Conceptual Tool Kit and the Key Parameters Staff Discussion Paper 2023-34 Alper Odabasioglu Regulators need to provide effective procyclicality guidance, and central counterparties must design and calibrate their margin systems and procyclicality frameworks appropriately. To serve these needs, we provide a novel conceptual tool kit. Further, we highlight that the focus should be on the key margin system parameters in determining procyclicality. Content Type(s): Staff research, Staff discussion papers Topic(s): Coronavirus disease (COVID-19), Credit risk management, Financial institutions, Financial markets, Financial stability, Financial system regulation and policies JEL Code(s): G, G0, G01, G2, G23, G28
Perceived versus Calibrated Income Risks in Heterogeneous-Agent Consumption Models Staff Working Paper 2023-59 Tao Wang Perceived income risks reported in a survey of consumer expectations are more heterogeneous and, on average, lower than indirectly calibrated risks based on panel data. They prove to be one explanation for why a large fraction of households hold very little liquid savings and why accumulated wealth is widely unequal across households. Content Type(s): Staff research, Staff working papers Topic(s): Business fluctuations and cycles, Monetary policy, Monetary policy and uncertainty JEL Code(s): D, D1, D14, E, E2, E21, E7, E71, G, G5, G51
Climate-Related Flood Risk to Residential Lending Portfolios in Canada Staff Discussion Paper 2023-33 Craig Johnston, Geneviève Vallée, Hossein Hosseini, Brett Lindsay, Miguel Molico, Marie-Christine Tremblay, Aidan Witts We assess the potential financial risks of current and projected flooding caused by extreme weather events in Canada. We focus on the residential real estate secured lending (RESL) portfolios of Canadian financial institutions (FIs) because RESL portfolios are an important component of FIs’ balance sheets and because the assets used to secure such loans are immobile and susceptible to climate-related extreme weather events. Content Type(s): Staff research, Staff discussion papers Topic(s): Central bank research, Climate change, Credit risk management, Econometric and statistical methods, Financial institutions, Financial stability JEL Code(s): C, C8, C81, G, G2, G21, Q, Q5, Q54
Understanding the Systemic Implications of Climate Transition Risk: Applying a Framework Using Canadian Financial System Data Staff Discussion Paper 2023-32 Gabriel Bruneau, Javier Ojea Ferreiro, Andrew Plummer, Marie-Christine Tremblay, Aidan Witts Our study aims to gain insight on financial stability and climate transition risk. We develop a methodological framework that captures the direct effects of a stressful climate transition shock as well as the indirect—or systemic—implications of these direct effects. We apply this framework using data from the Canadian financial system. Content Type(s): Staff research, Staff discussion papers Topic(s): Climate change, Economic models, Financial institutions, Financial markets, Financial stability JEL Code(s): C, C6, C63, G, G0, G01, G1, G10, G2, G20, Q, Q5, Q54
The impact of higher interest rates on mortgage payments Staff Analytical Note 2023-19 Maria teNyenhuis, Adam Su We investigate how the increase in interest rates since early 2022 is affecting mortgage payments. By November 2023, less than half of mortgage holders had faced higher payments. Many borrowers will see a sizable increase in payments at renewal, although income growth could help mitigate the impact. Content Type(s): Staff research, Staff analytical notes Topic(s): Credit and credit aggregates, Financial institutions, Interest rates, Recent economic and financial developments JEL Code(s): D, D1, E, E4, E5, G, G2, G21
Finding the balance—measuring risks to inflation and to GDP growth Staff Analytical Note 2023-18 Bruno Feunou, James Kyeong Using our new quantitative tool, we show how the risks to the inflation and growth outlooks have evolved over the course of 2023. Content Type(s): Staff research, Staff analytical notes Topic(s): Business fluctuations and cycles, Econometric and statistical methods JEL Code(s): C, C3, C32, C5, C58, E, E4, E44, G, G1, G17