The MacroFinancial Risk Assessment Framework (MFRAF), Version 2.0

This report provides a detailed technical description of the updated MacroFinancial Risk Assessment Framework (MFRAF), which replaces the version described in Gauthier, Souissi and Liu (2014) as the Bank of Canada’s stress-testing model for banks with a focus on domestic systemically important banks (D-SIBs). This new version incorporates the characteristics of the previous model and also includes fire-sale effects resulting from the regulatory leverage constraints faced by banks, as well as an enhanced treatment of feedback-loop effects between solvency and liquidity risks through both the pricing and costly asset-liquidation channels. These new features improve the model’s ability to capture the non-linear effects of risk scenarios on D-SIBs’ capital positions and shed light on the importance of additional channels of stress propagation. The model is also subject to a comprehensive sensitivity analysis.