Effective the first quarter of 2013, our regulatory capital, risk-weighted assets and regulatory capital ratios have been calculated pursuant to the Capital Adequacy Requirement (CAR) Guideline released by the Office of the Superintendent of Financial Institutions (OSFI) in December 2012 to implement the Basel III Accord in Canada. When calculating the pro-forma impact of Basel III on our regulatory capital (including capital deductions and qualifying and grandfathered ineligible capital), risk-weighted assets and regulatory capital ratios in prior periods, we assumed that our interpretation of OSFI's draft implementation guideline of rules and amendments announced by the Basel Committee on Banking Supervision (BCBS), and our models used to assess those requirements, were consistent with the final requirements that would be promulgated by OSFI. We have not recalculated our pro-forma Basel III regulatory capital, risk-weighted assets or capital ratios based on the CAR Guideline and references to Basel III pro-forma items refer to these items as previously estimated.
Assumptions about the level of default and losses on default were material factors we considered when establishing our expectations regarding the future performance of the transactions into which our credit protection vehicle has entered. Among the key assumptions were that the level of default and losses on default will be consistent with historical experience. Material factors that were taken into account when establishing our expectations regarding the future risk of credit losses in our credit protection vehicle and risk of loss to Bank of Montreal included industry diversification in the portfolio, initial credit quality by portfolio, the first-loss protection incorporated into the structure and the hedges into which Bank of Montreal has entered.
Assumptions about the performance of the Canadian and U.S. economies, as well as overall market conditions and their combined effect on our business, are material factors we consider when determining our strategic priorities, objectives and expectations for our business. In determining our expectations for economic growth, both broadly and in the financial services sector, we primarily consider historical economic data provided by the Canadian and U.S. governments and their agencies. See the Economic Review and Outlook section of this interim MD&A.
Economic Review and Outlook
The Canadian economy is growing modestly, held back by slower household borrowing, a moderation in housing market activity and tighter fiscal policies. Weak global demand and a strong currency continue to impact exports. The Eurozone economy is showing some signs of emerging from its lengthy recession, while China's economy has weakened in response to government policies to restrain credit growth and reduce the risk of financial imbalances. In the year ahead, Canadian consumer spending is projected to grow moderately, while residential construction should decline somewhat further. However, exports are expected to increase as U.S. demand improves, while business investment should strengthen in response to low commercial real estate vacancy rates and ongoing development of energy resources. Buoyant business loan growth should partly offset slowing consumer credit and residential mortgages. GDP growth is expected to increase from 1.6% in 2013 to 2.3% in 2014. The unemployment rate is projected to decline to 6.8% next year, below the average of the past decade. The Canadian dollar will likely trade below parity with the U.S. dollar this year, held back by the sizeable trade deficit. Modest growth and low inflation should encourage the Bank of Canada to keep overnight lending rates at 1% until the second half of 2014.
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