Bank of Canada sees financial system vulnerabilities easing

Bloomberg

The Bank of Canada is optimistic higher interest rates and regulatory efforts to rein in risky borrowing will make the country’s financial system more resilient, though the process could take time to unfold and the outcome remains uncertain. In its semi-annual financial stability report, Canada’s central bank painted a picture of a housing market where key steps have been taken to improve the quality of lending, particularly in the most expensive cities such as Toronto. At the same time, it warned risks remain elevated, particularly high household debt levels, and measures to rein in loans to the most highly indebted households will take time to work.
“Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation, but we need to continue to watch financial vulnerabilities closely,” Governor Stephen Poloz said in a statement. The language in the report parallels the main message in the central bank’s last Financial System Review in June — that of strengthening resiliency of the financial system on the back of an improving economy — that provided the backdrop for two rate increases in July and September.
The Canadian dollar pared some of its intraday losses after the report. The currency was down 0.2 percent to C$1.2798 per US dollar at 10:48 a.m. in Toronto trading.
The central bank cited three main reasons why it expects risks to mitigate over time: income growth, new mortgage finance policy measures and higher mortgage rates. New regulations — the federal government’s in 2016 and the banking regulator last month —limit the creation of new highly indebted households, and should reduce demand in cities like Toronto where speculative demand has been a factor, the central bank said.
“The effects of tighter mortgage rules implemented last year have already improved the quality of new insured lending,” the Bank of Canada said. “Income growth,
new mortgage finance policy measures and higher mortgage rates
are expected to mitigate this
vulnerability over time.”