Tiff talks

Even as the second wave of the COVID pandemic sweeps across the country, Bank of Canada Governor Tiff Macklem is looking ahead to the risks that litter the path to eventual recovery. In remarks to the Global Risk Institute this morning, he focused on risks to the recovery itself, risks that may arise during the recuperation phase, and risks related to by climate change. Unsurprisingly, many of the risks he addressed are related to debt. 

After briefly summarizing the steps that Canadian governments and the Bank itself have taken since the pandemic hit, Macklem moved on to discuss the financial risks. Intriguingly, he drew a parallel with the disastrous Fort McMurray fires of 2016, which the Bank has studied closely. "Then, as now, we saw a rapid stop in economic activity caused by a sudden shock. Then, as now, much of the lost ground was regained quickly. But the episode left economic scars that took a long time to heal."

Macklem noted that Canada's banks have provided mortgage relief to hundreds of thousands of borrowers over the past six months, but these deferrals are coming to an end. Moreover, the pandemic has severely hampered the ability of businesses to meet their fixed obligations, although the extension of emergency wage subsidies into 2021 will provide relief. Macklem described the financial system as well-capitalized and able to act as a shock absorber for households and businesses, but cautioned that the Bank is continuing to monitor the level of credit losses.  

As regards risks during the recuperation phase, Macklem's focus was squarely on household debt. A commitment to maintaining low interest rates sine die is a key element of the Bank's support to the economy, but the Bank is aware that low rates can foster both speculative buying and over-borrowing. The Canadian housing market experienced a remarkable bounce as the first wave of the pandemic faded: though Macklem did not mention this, Toronto was recently identified as one of the most over-extended housing markets in the world in a report by UBS. For the moment it appears that Macklem is confident that the Bank has the macroprudential tools it needs to cope with these risks. 

Finally, as regards climate change, Macklem stated that the financial system has a "critical role to play" in supporting the real economy's transition to a low carbon future. "If we are going to do a better job assessing, pricing and managing climate risks, we need better and more decision-useful information that combines climate-data analysis with economic and financial information. This will make the financial system and the real economy more resilient. And it will strengthen the ability of the financial system to fulfill its most critical role, which is to allocate savings to its most productive uses. This will help Canadians take advantage of sustainable investment opportunities."

Macklem's summing-up of the challenges ahead is worth quoting in full:

"The COVID-19 pandemic has made it painfully clear that how well we manage risks has a huge impact on our well-being. Globally, I don’t think it’s an exaggeration to say that the quality of risk management will increasingly influence the success and stability of societies. Of course, I’m talking about much more than financial-risk management. But the financial services sector has a leadership role to play. Two historic recessions in just over a decade have underlined just how much managing risks in our financial system matters to the livelihoods of Canadians. As we begin to recover from the economic fallout of the pandemic and look to the vulnerabilities ahead, sound risk management is more critical than ever."

A full agenda indeed.