Stress testing is not a prediction or a forecast
OTTAWA, October 18, 2017 — 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 2017 results released today. It is important to note that none of the scenarios tested are a prediction or a forecast.
Stress testing is an essential part of our risk management program. The Office of the Superintendent of Financial Institutions (OSFI) mandates that financial institutions run these simulations and verify that their business is able to withstand even the most extreme scenarios. In support of greater transparency with respect to our risk management practices, CMHC began publicly releasing stress test results in 2015.
In 2017, we tested our mortgage loan insurance and securitization businesses against several extreme scenarios including:
- Steep oil price fall
- U.S.-style housing correction (mortgage loan insurance only)
In each case, our testing confirms that our capital holdings are sufficient to weather each of these extreme scenarios.
The results of each scenario on CMHC’s regulatory capital requirements (%MCT) are provided below, noting CMHC`s target operating capital level is 165% MCT:
|For the period 2017-2022||Base Case||Anti-globalization||Earthquake||Steep oil price fall
||U.S.-style housing correction|
|Cumulative net income/loss - Insurance||$7,340||$118||$6,572||$5,589||-$217|
|Lowest point of capital available (% MCT) - Insurance||172%||181%||181%||183%||182%|
|Cumulative net income/loss - Securitization||$2,559||$2,639||$1,212||$2,562||N.A.|
|Lowest capital available-to- capital required (%) - Securitization||103%||103%||103%||103%||N.A.|
|Change in housing prices (peak-to-trough)||17.6%||-31.5%||-0.2%||-9.1%||-30.0%|
|Peak unemployment rate||6.9%||15.3%||8.2%||9.1%||12.0%|
*In millions, unless indicated
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.
“CMHC has always been and continues to be a stabilizing force in Canada’s housing system. As a responsible risk manager, we seek out extreme, almost unimaginable situations and ask ourselves ‘what if?’ That’s the goal of our stress testing – to measure how we would stand up to these unlikely shocks. In all cases, this year’s stress testing shows we are well capitalized to handle these very severe situations.”
|Base Case||Non-stressed situation according to CMHC’s Corporate Plan.|
|Anti-globalization||A rapid increase in interest rates in the United States coupled with unsustainable debt levels in China cause large negative demand shocks globally. Downturns in the United States and China subsequently cause protectionism, widespread use of tariffs and euro-zone break-up.|
|Steep oil price fall||Unexpected excess supply causes a sharp drop in the price of oil to below $20, followed by prices in the $20-$30 range for about 2 years prior to recovery.|
|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.|
|U.S.-style housing correction||A 5 percentage point increase in the unemployment rate with a 30% decline in house prices.|
CMHC Media Relations