Bank of Canada: system could survive major household debt shock

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By Alastair Sharp
GUELPH, Ontario, Feb 24 (Reuters) - While the
vulnerabilities associated with elevated household debt have
increased in recent years, the Canadian financial system remains
resilient and could withstand a major shock, a Bank of Canada
official said on Wednesday.
Record high consumer debt and hot home prices in parts of
the country have raised worries that a sudden retrenching by
over-extended Canadians could pose a risk to the economy and
financial system.
"The financial vulnerability associated with elevated
household debt has increased over the past decade," Deputy
Governor Lawrence Schembri said in prepared remarks for delivery
to the Guelph Chamber of Commerce.
"However, the Canadian financial system is very resilient
and could withstand the triggering of this vulnerability."
To assess the risk stemming from highly indebted households,
the bank simulated a persistent increase in the unemployment
rate of 5 percentage points, Schembri said, although he noted
the probability of this happening was low.
The bank found that household arrears rates could rise from
0.4 percent in 2014 to reach as high as 1.8 percent after three
years, with about 20 percent of the rise attributable to the
increase in debt and greater concentration that has been seen
among highly indebted households since 2007.
The rise in arrears could force some homeowners to sell or
default on their mortgages and other debt. While a rapid
increase in defaults or home sales would have direct impacts on
lenders and mortgage insurers, stress tests show that there are
sufficient buffers in the financial system to withstand such a
scenario, Schembri said.
"Despite the drop in the price of oil and some non-energy
commodities, the probability of this risk being triggered
remains low," Schembri said.
The expected pick up in the economy will help stabilize
household debt as growth, incomes and interest rates eventually
rise, said Schembri. He also pointed to other measures that have
been taken, including new rules from the Liberal government that
will force people who want to buy more expensive homes to
provide a bigger down payment. by Leah Schnurr and David Ljunggren Editing by W
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