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The Framework for Risk Identification and Assessment

Author

Listed:
  • Cameron MacDonald
  • Virginie Traclet

Abstract

Risk assessment models are an important component of the Bank’s analytical tool kit for assessing the resilience of the financial system. We describe the Framework for Risk Identification and Assessment (FRIDA), a suite of models developed at the Bank of Canada to quantify the impact of financial stability risks to the broader economy and a range of financial system participants (households, businesses and banks). These risks are tail-risk events that are rare and severe but plausible. FRIDA combines models that quantify the impact of risks on both aggregate macrofinancial variables and different types of financial system participants, thus allowing us to understand the channels through which severe shocks could be transmitted and amplified within the financial system. By including sectoral models, FRIDA can consider the rich institutional features and heterogeneity that characterize different parts of the financial system and capture the various channels through which they can be affected by shocks. Like any model, FRIDA faces model uncertainty. Consequently, results from FRIDA are used in combination with expert judgment to form an overall assessment of financial stability risks.

Suggested Citation

  • Cameron MacDonald & Virginie Traclet, 2018. "The Framework for Risk Identification and Assessment," Technical Reports 113, Bank of Canada.
    • Handle: RePEc:bca:bocatr:113
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    File URL: https://www.bankofcanada.ca/wp-content/uploads/2018/11/tr113.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Grzegorz Halaj & Sofia Priazhkina, 2021. "Stressed but not Helpless: Strategic Behaviour of Banks Under Adverse Market Conditions," Staff Working Papers 21-35, Bank of Canada.
    2. Thibaut Duprey & Xuezhi Liu & Cameron MacDonald & Maarten van Oordt & Sofia Priazhkina & Xiangjin Shen & Joshua Slive, 2018. "Modelling the Macrofinancial Effects of a House Price Correction in Canada," Staff Analytical Notes 2018-36, Bank of Canada.
    3. Nicholas Garvin & Samuel Kurian & Mike Major & David Norman, 2022. "Macrofinancial Stress Testing on Australian Banks," RBA Research Discussion Papers rdp2022-03, Reserve Bank of Australia.
    4. Thibaut Duprey, 2020. "Canadian Financial Stress and Macroeconomic Condition," Canadian Public Policy, University of Toronto Press, vol. 46(S3), pages 236-260, October.
    5. Tuzcuoglu, Kerem, 2024. "Nonlinear transmission of international financial stress," Economic Modelling, Elsevier, vol. 139(C).
    6. Tatiana Tikhonova & Olga Shik, 2008. "Alternative Employment in Rural Area in Russia," Research Paper Series, Gaidar Institute for Economic Policy, issue 114P, pages 224-224.

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    More about this item

    Keywords

    Economic models; Financial Institutions; Financial stability; Housing;
    All these keywords.

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • D1 - Microeconomics - - Household Behavior
    • G0 - Financial Economics - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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