For example, Canada’s prudential regulator, the Office of the Superintendent of Financial Institutions (OSFI), increased the required amount of capital that Canada’s big banks have to hold to protect themselves against financial-system vulnerabilities. Canada introduced a bail-in regime to ensure that investors—not taxpayers—would take the brunt of the financial burden in the unlikely event that a big bank were to fail.
Also, OSFI asked many smaller, single-business-line banks to reduce their reliance on short-term brokered funding, which can be flightier in stressful situations. The Bank of Canada, along with OSFI, evaluates these safeguards by conducting stress tests on the major banks. Given that the idea is to plan for the worst, it’s important to study extreme scenarios.