Bank of Canada: the risks are still the risks

The Bank of Canada released its semi-annual Financial System Review this morning.  Introducing the Report to the media, Governor Stephen Poloz noted that the key risks identified by the Bank are the same as they were six months ago, and indeed the same as they have been for several years now: high and rising household indebtedness, and imbalances (read: overvaluation) in the housing market.

Gov. Poloz pointed out that household indebtedness continues to rise faster than household incomes. As the OECD noted earlier this month, Canada's households are now the most indebted in the developed world.  The increase in debt has seemingly not yet been affected by the Bank's increasingly urgent warnings, or its steps toward tighter policy.

Poloz noted that steps by the Government to regulate high-ratio mortgages (less than 20 percent down-payment) more tightly have reduced the issuance of such mortgages.  However, the Bank is concerned over a possible deterioration in the quality of non-high ratio mortgages, with amortizations stretching beyond 25 years and more such loans being taken out by highly-indebted households. New regulations will be forthcoming in the new year to regulate these mortgages more closely and ensure that the borrowers can withstand a rise in interest rates.  The Bank welcomes this prospect, though one wonders whether Poloz ever asks himself why the lenders need the Government to impose such prudence on them, rather than adopting it themselves.

As regards the housing market, Poloz notes that the froth seems to have come off the Toronto area market in response to steps announced by the Ontario Provincial Government back in April.  However, the Bank is waiting to see whether Toronto house prices follow the pattern set in Vancouver, where the effect of earlier government measures seems to have faded, with prices starting to rise again.  Poloz also notes that the fundamentals of the market are strong, with demand driven by rising population and employment.

The Bank's conclusion is that Canada's financial system remains "resilient".  That message is likely to be reinforced over the course of this week by the release of  financial results for the major banks.  The first of these, Scotiabank, today announced an 11 percent year-on-year rise in profits, a remarkable result considering nominal GDP is rising at less than a 6 percent pace.  So far there has been little evidence of any impairment in the banks' credit quality, despite the surge in household debt. Some commentators are suggesting that Gov. Poloz sounded a little complacent today, but for now, he seems to be on solid ground.