CMHC stress testing shows it is well capitalized and able to withstand extreme scenarios

Logo: CMHC (CNW Group/Canada Mortgage and Housing Corporation)

OTTAWA, Oct. 2, 2018 /CNW/ - 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 Canadian financial institutions
• Earthquake
• 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.

For more information, visit our website or follow us on Twitter, YouTube, LinkedIn and Facebook.

Quote

"As a stabilizing force in Canada's housing system, CMHC role as a responsible risk manager includes seeking out extreme, almost unimaginable situations and examining how well we can withstand them. We expanded our stress testing in 2018 to include new scenarios such as a global trade war, a household debt crisis, repeated cyberattacks and the eruption of a volcano. In all cases, this year's stress testing shows we are well capitalized to handle these very severe situations."

Steven Mennill
Chief Risk Officer
Canada Mortgage and Housing Corporation

Scenario Descriptions
Base Case	Non-stressed situation, reversion to 'normal'.
Financial Stress	A significant credit and liquidity event leads to a household debt crisis, and the failure of a major Canadian financial institution.
Sustained low oil price	Unexpected excess supply causes a sharp drop in the price of oil and prices remain between US$20-30 for around five years.
Global Trade War	Rising risks of anti-globalization stemming from protectionist political sentiments around the world leads to a global trade war, triggering a slowdown in the Canadian economy.
Cyberattack	Repeated major cyberattacks on the Canadian financial system undermine confidence in financial institutions, cause severe disruption to business operations and have a material negative impact on the Canadian economy.
Earthquake	Multiple scenarios of a high-magnitude earthquake that disrupts critical infrastructure and services in a major urban centre, including broader financial impacts as a result of its effects on homeowners and businesses were run. Reporting reflects the most severe outcome of the simulations.
Major volcanic eruption	A major volcano erupts causing significant damage, including disruption of air traffic and shipping around the globe. Air travel disruption affects trade in the sectors that depend on air-freighted imports and exports. Ash rain from the eruption causes severe damage to crops, causing food scarcity and price inflation.

Historical Context
	CMHC Scenarios*			Historical Housing Crises
Key Variables	Financial Stress	Global Trade War	Low oil price	1990s Recession	1981/82 Recession	1929-1933 (US)	1873-1896 (UK
Real GDP Growth (peak-to-trough)	-3.3%	-0.3%	0.00%**	-3.4%	-5.1%	-26%	-4.9%
Duration with declining GDP (quarters)	6	3	2	4	6	20	16
Peak unemployment rate	7.4%	7.6%	7.3%	11.7%	13.0%	24.75%	9.1%
Duration with increasing unemployment (quarters)	6	3	2	15	7	20	28
Change in housing prices (peak-to-trough)	-24.0%	-13.8%	-12.0%	-8.0%	-9.0%	-24.0%	N/A
Duration with declining HPI (quarters)	3	2	1	2	3	20	N/A
*The scenarios numbers in the table reflect periods of at least two consecutive quarterly declines in GDP growth (i.e. recessions). This allows for a direct comparison with historical recessionary periods.
**Negligible decline

BACKGROUNDER & DEFINITIONS

• CMHC follows the guidance set by the Office of the Superintendent of Financial Institutions (OSFI) with respect to stress testing. CMHC also develops its own stress testing cases for business planning purposes.
• The Minimum Capital Test (MCT) is the ratio of capital available to regulatory capital required. Below 100% MCT, an insurance company may no longer be allowed to write new business. A level below 0% MCT indicates insolvency.
• The underlying variables within each of the stress testing scenarios were developed based on a combination of hypothetical and historical economic analysis.
• Change in housing prices from peak-to-trough describes the highest and lowest point of housing prices during the forecast period of the crisis scenario.

SOURCE Canada Mortgage and Housing Corporation

Media inquiries: Audrey-Anne Coulombe, CMHC Media Relations, 613-748-2573, [email protected]

Related Links

http://www.cmhc-schl.gc.ca