The IMF have released their working papers following their analysis of Canadian Banks.  Notwithstanding the positive comments about Canadian banks financial position entering the crisis, there remains potential for a requirement for increased capital as negatives in Canada could decrease bank capital by 2.5% – 3.5% over next year or two.

The IMF employed the American stress test approach to Canadian banks in this exercise.

Here is the current position:

There are two ratios being watched – Tier 1 and Total Capital.  In a nutshell and worst case scenario, IMF are saying if 2.5% or 3.5% is taken off either ratio, most banks risk being below the Canadian targets shown at the foot.

The potential negatives on bank capital were recognised as:

1. Western Canada house values having some more downward corrections anticipated.  Eastern Canada is about right in their view.
2. collapse of auto sector
3. variances in commodity prices
4. continued high unemployment

The external influences on Canada are summarise in this graphical story line.  Here is the full paper.  Canada: 2009 Article IV Consultation—Staff Report cr09162