People pass the Bank of Canada building on Wellington Street in Ottawa, on Tuesday, May 31, 2022.The Bank of Canada says it is more concerned than it was a year ago about the risks posed by high household debt to the Canadian financial system, while the recent banking crises in the U.S. and Switzerland have exposed vulnerabilities amid the current environment of high interest rates. THE CANADIAN PRESS/Justin Tang
OTTAWA – The Bank of Canada says it is more concerned than it was a year ago about the risks posed by high household debt to the Canadian financial system.
In its latest financial system review, the central bank says higher borrowing costs mean more households are expected to face financial pressure in the coming years, while a decline in housing prices has reduced homeowner equity.
A severe global recession that causes housing prices to fall further could lead to more loan defaults, resulting in sizable credit losses for Canadian banks if such defaults were to occur on a large scale among uninsured mortgages with negative equity.
The bank says that although spillover effects in Canada from recent stresses in the global banking sector have been limited, deposit runs at U.S. banks earlier this year highlight the need for institutions to be more vigilant as they adapt to higher interest rates.
It says that adjustment to higher interest rates could exacerbate stresses.
The central bank says financial stability could also be threatened by a potential major cyber attack and more frequent extreme weather events associated with climate change.
This report by The Canadian Press was first published May 18, 2022.
