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Annik Faucher, a spokesperson for OSFI, said the regulator does not disclose details of specific scenarios used to stress test Canada’s largest banks — those categorized as domestic systemically important financial institutions. Those banks also conduct their own internal tests to assess the impact of “severe but plausible” scenarios, which are shared with OSFI, she said.

Still, market watchers said the more pessimistic stress tests that must be conducted by Canada’s smaller deposit-taking institutions shed some light on what the regulator is thinking.

One noteworthy element of the new tests for the smaller banks is that they will measure the impact on more than just the closely watched CET1 capital level and total ratios. They will also contemplate scenarios in which a bank’s “authorized leverage ratio may be breached.”

Insured mortgages are not used to calculate capital requirements, but they are included in the leverage ratio, so their impact would be captured by the new stress test requirements, said Jason Mercer, an analyst at Moody’s Investors Service.

“In theory, a bank could beat the stress [test on capital] by assuming it starts insuring the remainder of its mortgage portfolio,” he said. “The leverage ratio would then pick this up” and could fall below the required threshold even if capital did not.



The regulator’s stepped-up stress tests are “not surprising given the recent concerns on housing and household debt,” said Mercer, who recently wrote a report that estimated a U.S.-style housing crisis would cost the country’s biggest banks and mortgage insurers more than US$17 billion.