Transcript Impact of New Regulatory Capital Framework

CMHC`s Stress Test Exercise and
Earthquake Risk
Housing Finance Symposium
October 4, 2016
CANADA MORTGAGE AND HOUSING CORPORATION
Background
 CMHC conducts Corporate-Wide Stress Testing to assess its
financial solvency and operational resiliency through extreme but
plausible events
 Catastrophic events such as earthquakes are among the key
scenarios considered
 CMHC mortgage insurance does not cover physical damage to
structures from earthquakes
CANADA MORTGAGE AND HOUSING CORPORATION
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Earthquake Scenario
• Scenario narrative and Economic impact
• An earthquake event leads to substantial property damage,
including to telecommunications and transportation
infrastructure
• There is material disruption to regional business operations that
lasts for several quarters until the infrastructure is repaired. A
decline in housing prices is triggered
• Despite the stimulus provided from reconstruction spending, the
disruption to business operations, hit to the insurance sector and
damage to consumer and investor confidence mean that it takes
several years for the Canadian economy to recover properly
CANADA MORTGAGE AND HOUSING CORPORATION
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Earthquake – Key Severity Metrics
Growth Rate of Real GDP
Unemployment Rate
9.0%
6%
8.5%
4%
8.0%
2%
7.5%
0%
7.0%
-2%
6.5%
-4%
6.0%
5.5%
-6%
-8%
2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1
5.0%
2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1
5-Year Mortgage Interest Rate
20%
Average Resale Home Price, Year-over-year
Change, MLS®
6%
15%
10%
5%
5%
4%
0%
3%
2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1
Base – earthquake-impacted region
Earthquake – earthquake-impacted region
-5%
2015Q1
2016Q1
2017Q1
2018Q1
2019Q1
2020Q1
2021Q1
Base – Canada
Earthquake – Canada
CANADA MORTGAGE AND HOUSING CORPORATION
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Earthquake – Key Severity Metrics
2-year Bond Yield Spread
CPI (2002 = 100)
145
143
141
139
137
135
133
131
129
127
125
2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1
Baseline
5%
4%
3%
2%
1%
0%
2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1
Earthquake
5-year Bond Yield Spread
Baseline, Govt
Earthquake, Govt
Baseline, Corp.(A)
Earthquake, Corp.(A)
10-year Bond Yield Spread
5%
6%
4%
5%
4%
3%
3%
2%
2%
1%
1%
0%
2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1
0%
2015Q1 2016Q1 2017Q1 2018Q1 2019Q1 2020Q1 2021Q1
Baseline, Govt
Earthquake, Govt
Baseline, Govt
Earthquake, Govt
Baseline, Corp.(A)
Earthquake, Corp.(A)
Baseline, Corp.(A)
Earthquake, Corp.(A)
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Summary Impacts
 Regional impacts are the primary focus, however National
impacts are likely in the short and medium-term
 It is of note that CMHC mortgage insurance does not cover
physical damage to structures from earthquakes, however
mortgage insurance claims could increase as a result of
secondary ``ripple`` effects of an earthquake
 Stress Testing results indicate that CMHC is well capitalized
and would remain solvent following a catastrophic
earthquake event
 Assessment of operational impacts is an ongoing activity
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