November 14, 2018 / 4:02 PM / a month ago

Bank of Canada sees slightly higher perceived risk to financial system

OTTAWA (Reuters) - The overall perceived risk to the Canadian financial system has increased slightly over the last six months, in part due to unease over the global economic outlook, the Bank of Canada said on Wednesday.

FILE PHOTO: Bank of Canada Governor Stephen Poloz walks to a news conference in Ottawa, Ontario, Canada, April 18, 2018. REUTERS/Chris Wattie/File Photo

A semiannual central bank survey of risk management professionals showed that 44 percent felt the chances of a high-impact event with potential to severely impair the financial system had grown slightly, while 50 percent saw no change.

The survey added that 95 percent of respondents were at least fairly confident that the financial system would be resilient in the face of such a shock.

Compared to the last survey, respondents perceived a higher chance of the global economic outlook deteriorating and also fretted about a reduction in market liquidity, the bank said.

The Bank of Canada has raised interest rates five times in the last 16 months as the economy strengthened and says it is paying close attention to how people with debts are coping with higher repayments every month.

The debt service ratio, which measures debt payments as a proportion of disposable income, hit 14.15 percent in the second quarter of 2018, the highest in almost 10 years.

Market operators are expecting the bank to raise interest rates again in January and say two further hikes could follow before the end of 2019.

Bank of Canada senior deputy governor Carolyn Wilkins told reporters that the central bank was keeping an eye on the ratio and felt the overall situation was manageable, given the economy and incomes were growing.

About a quarter of those polled in the survey said a 150- to 200-basis point rise in Canadian five-year interest rates over a 12-month period could trigger adverse events like a housing price correction or a large increase in household defaults.

However, few respondents felt there was much chance that rates would go up so quickly in the next year.

The bank, as well as government policymakers, have expressed repeated concern that Canada’s housing markets - in particular, those in the major cities of Toronto and Vancouver - might be at risk of overheating.

Federal authorities have tightened mortgage rules over the last two years to improve the quality of new lending.

The central bank released results of a model it said showed Canadian banks’ capital positions would not be affected by a 20 percent correction in the housing market, with the biggest declines in Toronto and Vancouver.

Reporting by David Ljunggren; Editing by Bill Berkrot

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