John Greenwood Dec 8, 2011 – 12:01 PM ET
The Bank of Canada is warning that conditions in the global financial system have “deteriorated significantly” since the summer because of the worsening European debt crisis and weaker world-wide economic outlook.
Despite the relative health of the domestic banking system, the rise in negative pressures worldwide will likely have a “considerable impact” in this country, the central bank said in the latest edition of its biannual Financial System Review.
In its starkest warning since the beginning of the turmoil, it said stability of the Canadian banking system faces a “very high risk” from the turmoil in Europe, which it deems by far the most serious threat.
The comments come the same day as leaders of European countries are set to gather to hammer out a deal on revisions to the eurozone treaty aimed at avoiding a potential collapse of the currency region.
According to the Bank of Canada, the risks have “increased markedly” since June.
However much of the optimism that the 27 countries would be able to agree to a solution has evaporated over the last few days amid widening division. Fractious issues range from the flexibility that European Central Bank might exercise in supporting troubled countries to Britain’s demand that nothing be done to harm London’s role as a financial centre. In a sign of just how divisive the situation has become, policymakers are even arguing over how many countries need to sign the deal.
According the Bank of Canada, other risks to this country’s financial system include an economic downturn that could be amplified by weakened global banks and financial stress on over-indebted Canadian households.
While the bank goes to considerable lengths to quantify the various threats, it points out that due to the interconnectedness of the global financial system, the individual risks are “mutually reinforcing,” meaning that a change in one type of risk will impact and potentially magnify the other risks.
If things go badly in one sector, all the risks could be equally damaging.
For example, “a further intensification of the sovereign debt crisis in Europe can be expected to weaken global economic growth. The more fragile global outlook would, in turn, fuel sovereign fiscal strains, impair the credit quality of bank loan portfolios, and raise the probability of an adverse shock to the income or wealth of Canadian households.”
Bank of Canada Governor Mark Carney has warned on several occasions that consumer debt which is sitting at record levels has left Canada vulnerable to economic shocks such as a rise in unemployment or interest rates. According to the Financial Services Review, the level of indebtedness has increased over the past six months.
The vast majority of the borrowing is related to real estate, with outstanding mortgages in over the $1-trillion mark.
In a bid to curb growth of consumer borrowing, the federal government has tightened mortgage lending rules three times over the past few years. But household debt levels continued to grow, and now sit at more than 150% of income, according to Statistics Canada.
The concern is that many Canadians would have difficulty making their mortgage payments if the employment picture declined significantly, potentially causing a rise in defaults which in turn would trigger a series of negative repercussions with implications for lenders as well as the broader economy.
One of the more direct impacts would be housing prices which are already overheated, according to many observers.
The Bank of Canada zooms in on the condo market which it says may be facing “heightened risk of a correction” due to what it calls “elevated” supply of completed but unoccupied units.
“A sharp and persistent increase in the unemployment rate would… have adverse knock-on effects on consumer confidence, the housing market and Canadian household net worth,” according to the Financial System Review.
www.christinebuemann.com
The Bank of Canada is warning that conditions in the global financial system have “deteriorated significantly” since the summer because of the worsening European debt crisis and weaker world-wide economic outlook.
Despite the relative health of the domestic banking system, the rise in negative pressures worldwide will likely have a “considerable impact” in this country, the central bank said in the latest edition of its biannual Financial System Review.
In its starkest warning since the beginning of the turmoil, it said stability of the Canadian banking system faces a “very high risk” from the turmoil in Europe, which it deems by far the most serious threat.
The comments come the same day as leaders of European countries are set to gather to hammer out a deal on revisions to the eurozone treaty aimed at avoiding a potential collapse of the currency region.
According to the Bank of Canada, the risks have “increased markedly” since June.
However much of the optimism that the 27 countries would be able to agree to a solution has evaporated over the last few days amid widening division. Fractious issues range from the flexibility that European Central Bank might exercise in supporting troubled countries to Britain’s demand that nothing be done to harm London’s role as a financial centre. In a sign of just how divisive the situation has become, policymakers are even arguing over how many countries need to sign the deal.
According the Bank of Canada, other risks to this country’s financial system include an economic downturn that could be amplified by weakened global banks and financial stress on over-indebted Canadian households.
While the bank goes to considerable lengths to quantify the various threats, it points out that due to the interconnectedness of the global financial system, the individual risks are “mutually reinforcing,” meaning that a change in one type of risk will impact and potentially magnify the other risks.
If things go badly in one sector, all the risks could be equally damaging.
For example, “a further intensification of the sovereign debt crisis in Europe can be expected to weaken global economic growth. The more fragile global outlook would, in turn, fuel sovereign fiscal strains, impair the credit quality of bank loan portfolios, and raise the probability of an adverse shock to the income or wealth of Canadian households.”
Bank of Canada Governor Mark Carney has warned on several occasions that consumer debt which is sitting at record levels has left Canada vulnerable to economic shocks such as a rise in unemployment or interest rates. According to the Financial Services Review, the level of indebtedness has increased over the past six months.
The vast majority of the borrowing is related to real estate, with outstanding mortgages in over the $1-trillion mark.
In a bid to curb growth of consumer borrowing, the federal government has tightened mortgage lending rules three times over the past few years. But household debt levels continued to grow, and now sit at more than 150% of income, according to Statistics Canada.
The concern is that many Canadians would have difficulty making their mortgage payments if the employment picture declined significantly, potentially causing a rise in defaults which in turn would trigger a series of negative repercussions with implications for lenders as well as the broader economy.
One of the more direct impacts would be housing prices which are already overheated, according to many observers.
The Bank of Canada zooms in on the condo market which it says may be facing “heightened risk of a correction” due to what it calls “elevated” supply of completed but unoccupied units.
“A sharp and persistent increase in the unemployment rate would… have adverse knock-on effects on consumer confidence, the housing market and Canadian household net worth,” according to the Financial System Review.
www.christinebuemann.com
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