Canada Mortgage and Housing Corporation’s stress testing of its own capital levels confirms its ability to weather severe but extremely unlikely scenarios, according to 2018 results released today. It is important to note that none of the scenarios tested should be considered a prediction or a forecast.
Stress testing is an essential part of our risk management program. All federally-regulated financial institutions run these simulations and verify that their business is able to withstand even the most extreme highly unlikely scenarios. In support of greater transparency with respect to risk management practices, CMHC began publicly releasing stress test results in 2015.
In 2018, we tested our mortgage insurance and securitization businesses against several extreme scenarios including:
- Financial stress
- Sustained low oil price
- Global trade war
- Cyberattack on Canadianfinancial institutions
- Major volcanic eruption
In each case, our testing confirms that our capital holdings are sufficient to allow CMHC to meet its obligations under each of these extreme scenarios.
Additional details on these scenarios are included below.
The Office of the Superintendent of Financial Institutions (OSFI) recently released new capital guidelines for mortgage insurers: the Mortgage Insurer Capital Adequacy Test (MICAT) with an effective date of January 1, 2019.
The results of each scenario on CMHC’s regulatory capital requirements (measured as a percentage of the Minimum Capital Test – “%MCT”) are provided below. These results assume no management actions (e.g., dividend suspension) are undertaken in response to crisis situations – in a real crisis CMHC would actively seek to manage losses and capital in order to stabilize housing and financial markets.
|For the period 2018-2027||Base Case||Financial Stress||Low oil price||Global Trade War||Cyberattack||Earthquake||Volcano|
|Cumulative net income/loss - Insurance||$11,886||$4,876||$7,446||$8,509||$10,556||$9,461||$9,575|
|Lowest point of capital available (% MCT)||161.5%||85.3%||145.2%||157.3%||153.7%||156.1%||157.2%|
|Cumulative net income/loss - Securitization||$6,279||$7,179||$6,181||$6,401||$6,392||$4,687||$6,251|
|Change in housing prices (peak-to-trough)||53.3%||-46.7%||-28.1%||-23.8%||-18.0%||-19.6%||-19.6%|
|Peak unemployment rate||6.7%||10.5%||7.5%||7.9%||7.3%||7.4%||7.6%|
*In millions, unless indicated
While these scenarios are extreme and unlikely, CMHC has developed internal action plans for each event.
As Canada’s authority on housing, CMHC contributes to the stability of the housing market and financial system, provides support for Canadians in housing need and offers objective housing research and information to Canadian governments, consumers and the housing industry.