The Framework for Risk Identification and Assessment

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.