Understanding Systemic Risks in the Canadian Financial System

This paper reviews recent efforts to monitor and assess systemic risk in the Canadian financial system and outlines a framework for future system-wide stress testing. We examine how perceived and actual interconnections—across banks and non-bank financial institutions, domestic and foreign entities, and institutions of different sizes—shape the propagation of financial stress. We then review advances in system-wide stress-testing approaches, including agent-based and equilibrium-based models that capture downside amplification mechanisms and macro-financial feedback. Finally, the paper presents a blueprint for a Canadian system-wide stress-testing and reverse stress-testing toolkit designed to support the assessment of financial system resilience.