Over this period, some asset managers have shifted their portfolios to riskier, less-liquid assets. The Canadian economy entered 2022 in a strong position. Residential investment will contribute positively to growth again in 2022. See D.Cimon and A.Walton, Fixed-income dealing and central bank interventions, Bank of Canada Staff Analytical Note (forthcoming), for an explanation of how a central bank can most efficiently target its asset purchases to increase the capacity of banks to intermediate in fixed-income markets. Alternatively, the data is available for download in: * Percentage of firms reporting positive sentiment minus the percentage reporting negative sentiment; double-weighted balance of opinion; range of potential outcomes is from -200% to 200%.Note: This question was not asked in September. Public health mesures are being relaxed across the provinces thanks to high vaccination rates75% of the adult population is fully vaccinated. For financial instruments to be appropriately priced, market participants need access to reliable information on firms and financial institutions exposure to climate-related risks and on their transition plans. Russias invasion of Ukraine is compounding the risks to global financial stability. Other BOS respondents, including those tied to hard-to-distance services, expect their sales growth to remain healthy but to moderate to a more normal rate after the period of exceptional strength they recently experienced. These measures would better align housing supply and demand, which could help to moderate increases in house prices over the medium term. This steering group will conduct an industry-wide consultation on the fail fee later in 2022 before the Canadian Fixed-Income Forum makes a final decision on its implementation. These effects can include financial losses, a loss of confidence, a loss of privacy and a loss of data integrity. 2022. Corporate credit spreads have widened, and most global equity indexes are down significantly in 2022. Cryptoassets are also becoming more integrated into the traditional financial system (often referred to as the financialization of cryptoassets), including through the development of crypto derivatives markets and as investment assets or collateral for loans. Firms could mention more than one bottleneck; mentions were then pooled and counted only once by type of bottleneck.Last observation: Businesses anticipate that their sales will grow at a slower pace over the next 12months (Chart8, blue bars). In this context, the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions have published draft guidance on how international standards for payment systems apply to global stablecoin arrangements.50 The Financial Stability Board is working to update its recommendations for regulating global stablecoin arrangements. The aim is to develop an approach for stablecoin arrangements that will safeguard: Bank staff conducted a stress-testing exercise to evaluate the resilience of the banking sector to a large and persistent economic shock.51 They employed a hypothetical risk scenario that entailed a severe and prolonged recession (a 5.8% decline in GDP lasting six quarters) to test the capital positions of domestic systemically important banks in Canada. Box 5: Stablecoins and their risks to financial stability, Stablecoins aim to meet the demand for a liquid and less volatile cryptoasset. We use cookies to help us keep improving this website. The financial industry remains at the leading edge of cyber risk management practices.35 Financial institutions have invested in further improving their security controls and contingency plans, including third-party risk management practices, in light of the most recent state-sponsored and other cyber attacks observed around the world. This increase is greater in the short term, although the reported medium-term likelihood is slightly higher. Of course, credit conditions will remain favourable and affordable in the near future as these increases are phased in over time. Information contained on this site has been prepared by Scotiabank Economics. Nov 3, 2022 -Canada federal economic and fiscal update . Our Valet API is designed to help you integrate your applications and processes with our data. While they do not yet pose a systemic risk to the Canadian financial system, the lack of a regulatory framework means they operate without many of the safeguards that exist in the traditional financial system. That will be the case for housing starts as well. For more details on the estimation of the House Price Exuberance Indicator, see U.Emenogu, C.Hommes and M.Khan, , 17. Some issuers of cryptoassets have tried to resolve this problem by pegging the value of their cryptoasset to a reference assettypically the US dollar.49. Cyber threats in an interconnected financial system increase the effects of this vulnerability. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic. A forthcoming staff analytical note will describe the balance sheet mechanics of QE and QT for the Bank and the Canadian banking system. Download staff projections and learn how the data is structured. In 2021, they made purchases at a faster pace than first-time or repeat homebuyers. In contrast, cyber attacks performed in the context of a geopolitical military conflict, which could include targeting a countrys financial system, are purposely designed to inflict the most damage. After months of exceptionally strong activity in the housing market, resales slowed considerably in March and April2022 (Chart7). For example, in the case of SWP-GDP1987Q1: We use cookies to help us keep improving this website. Through the use of total return swaps and prime brokerage agreements with multiple banks, Archegos had been able to amass extremely high leveraged positions and was unable to meet its margin calls. They assumed no remedial fiscal and monetary policy measures, so the recession had a long-lasting negative impact on the Canadian economy. [, 53. Nevertheless, the risk of a further, disorderly repricing of risk remains. Alternatively, the data is available for download in: Source: Bloomberg Finance L.P.Last observation: June 7, 2022, Note: The Merrill Lynch Option Volatility Estimate (MOVE) is a weighted index of implied volatility on 1-month Treasury options and reflects near-term bond market sentiment. Similarly, a longer amortization period not only reduces monthly payments but also removes the option to extend amortization if an adverse income shock occurs. In this context, highly indebted households are especially vulnerable to a loss of income, particularly if combined with a decline in house prices (see A large decline in household income and house prices). To illustrate this point, Chart10 shows the projected distribution of growth for the first quarter of 2024. Borrowers who took out a variable-rate mortgage would see a median increase in their mortgage payment of more than $700 per month. This updated version of the HRAM builds on the original by explicitly modelling household consumption, savings and mortgage repayment decisions and, using a variety of data, can estimate levels of household assets, debt and income in subsequent years. But this has not occurred to date. In addition, if the shock were to cause house prices to drop considerably, reduced equity would further restrain the ability of some households to use secured sources of borrowing, such as home equity lines of credit or mortgage refinancing. Firms operating in cryptoasset markets often perform functions similar to those of traditional financial institutions. Cryptoassets have generally become more accessible to investors in recent years through the emergence of closed-end funds, crypto exchange-traded funds and listed companies dealing in or mining cryptoassets. Businesses expect their price increases to moderate due to downward pressure on prices for commodities and other input goods. Financial entities that allow virtual currency transactions and offer virtual currency services are also subject to these requirements. Note: Results are in response to the Financial System Survey question: What is the likelihood that a large shock with the potential to severely impair the functioning of the Canadian financial system will occur in the short term and medium term?Source: Bank of CanadaLast observation: spring2022. Firms main bottlenecks remain related to labour constraints and supply chain issues (Chart7). The resilience of Canadian banks is key to preserving the stability of the financial system. Forecasts as of November 4, 2022 for Latin America and October 17, 2022 for all other countries. In particular, the Bank participates actively in the Senior Advisory Committee (SAC) and the Financial Institutions Supervisory Committee. In theFinancial System Review, the Bank of Canada identifies the main vulnerabilities for and risks in the financial system in Canada and explain how they have evolved over the past year. This means ensuring resilient operations, which includes preserving the integrity of personal and financial data. The vulnerabilities associated with elevated household indebtedness and high house prices increase the downside risks to future growth in gross domestic product (GDP). Furthermore, a greater number of firms than in the last survey reported that their future sales indicators (e.g.,order books, sales inquiries) have worsened compared with a year ago (Chart8, red line). Regulators globally have recognized the risks posed by deficient regulatory frameworks and are working to address them. This evidence suggests that disruptions to high-yield debt markets would have less impact on the Canadian economy than previously assumed because most businesses that use such debt can draw on other funding sources if needed. However, the divergence between U.S. and Canadian interest rates should help keep the Canadian dollar close to US$0.77 despite the risk of a more urgent change of course from the Federal Reserve. improved, deteriorated or remained the same? This question was not asked in the BLP in January or March2022. And with global prices of energy commodities now substantially higher than they were before the invasion of Ukraine, valuations of carbon-intensive assets appear farther away from where they will need to be in a future low-carbon economy. While inflation has come off its peak, it remains too high. They are the Royal Bank of Canada, Toronto Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada.Sources: Big Six banks public quarterly financial statementsLast observation: 2022Q2. Alternatively, targeted attacks on critical infrastructuresuch as the electricity grid or providers of telecommunications, cloud or critical servicescould disrupt operations in multiple sectors, including the financial sector. The recent collapse in the value of TerraUSD, a stablecoin that uses an algorithm to adjust its supply so its value stays steady, provides a prime example of how the lack of transparency and trust about the way stablecoins peg their value makes them vulnerable to investor runs. The market capitalization of cryptoassets (including stablecoins) rose from about US$200 billion at the start of 2020 to a peak of close to US$3trillion in November2021 (Chart15). Such a scenario could reduce the confidence households and businesses place in the financial system, and preserving trust in the system is a key factor in maintaining financial stability. Investors in cryptoassets do not benefit from the same levels of protection offered for other classes of assets. that require large numbers of workers. Each time a new institution is compromised, any institutions connected to it become at risk of being compromised as well, including the institution that was initially attacked. 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