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 review of the financial system, the central bank says rising borrowing costs mean more households are expected to face financial pressures in coming years, while a drop in oil prices real estate has reduced owners’ equity in land.
A severe global recession that drives down house prices further could lead to more loan defaults. If these defaults were to occur on a large scale among uninsured mortgages with negative equity, this could translate into substantial credit losses for Canadian lenders.
The bank says that while the fallout in Canada from the recent strains in the global banking sector has been limited, the deposit runs at U.S. banks earlier this year underscore the need for financial institutions to be more vigilant as that they adjust to higher interest rates.
She added that the adjustment to higher interest rates could exacerbate tensions.
The central bank says financial stability could also be threatened by a potential major cyberattack and more frequent extreme weather events associated with climate change.
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