BoC Financial System Review Underlines Risks to Outlook

Market Trends - 16/12/2015

Bank of Canada Governor Stephen Poloz held a press conference on Tuesday following the release of the Financial System Review. The Central Banker remarked that a severe recession, accompanied by a steep jump in unemployment, remains the key risk to the country’s financial system. The most important weak spot in the country's financial system was assigned to climbing household debt. The debt itself is increasingly concentrated among borrowers tending to be under 45 years old that usually have lower incomes, putting this category of borrower at higher risk especially in a shrinking economy.  The Bank of Canada has already cut rates twice this year in response to low oil prices and the tightening of mortgage rules last week gave the Central Bank Governor more room for maneuvering without having to worry about loose monetary policies leading to an overheated housing market. The change comes as household debt hit another record high in the third quarter, with debts reaching 163.70% of incomes, up from 162.70% in the previous quarter as recorded by Statistics Canada.


The Government’s recent decision has tightened mortgage lending regulations on properties in an effort to cool rapid appreciation in major cities such as Toronto and Vancouver. A swift correction in one or both of these markets would have an outsized impact on the Canadian economy and the financial sector, according to the Poloz. Finance Minister Jim Flaherty announced that as of February 2016, homebuyers will have to put a 10.00% down payment on the portion of the price of a home above CAD$500,000. Anything under CAD$500,000 will still only require a 5.00% down payment. Governor Poloz ended the review by stating that Canadian banks are exposed to low commodity prices, as are all parts of the economy, but they are resilient enough to withstand the shock.  The Canadian dollar might not agree based on the rapid losses which have seen the USDCAD pair hit multi-year highs on the back of perceived Canadian weakness.

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