The Bankwatch

Tracking the consumer evolution of financial services

Bank of Canada notes consumer credit remains a risk

Despite the general view that Canada and its banks is in relatively better condition that international peers, down side risks remain, and are relatively unchanged since Jun 2009. This statement sums that up, and introduces a key point about this crisis and how little has been done to prevent re-occurrence.

Bank of Canada Financial System Review

Despite notable improvement in funding markets, funding and liquidity constraints remain an important area of vulnerability. Should a negative shock occur, such as a renewed downturn in the global economy or a loss of investor confidence, funding and liquidity pressures would likely reappear relatively quickly. Improvements in central bank liquidity facilities since the onset of the crisis and ongoing initiatives to support the resilience of core funding markets should help to limit the impact on the overall financial system. “Improving the Resilience of Core Funding Markets” (p. 41) discusses such issues

The Review confirms bank balance sheets have improved modestly, but that consumers have worsened. The concern for consumers is the underlying concern in this report, and their increased debt loads.

On Banks:

The leverage of Canadian banks, already low relative to that of their international peers, has fallen further since June, owing largely to an increase in their capital base from retained earnings. Nonetheless, given their key role as intermediaries between savers and borrowers, Canadian banks remain exposed to the risk of a marked deterioration in economic conditions.

On Consumers:

In the June 2009 FSR, the Bank judged that, since the onset of the recession, the risk that substantial credit losses on Canadian household loan portfolios could be a source of stress for the broader financial system had increased, although it remained a low-probability risk. This was illustrated by a stress-testing exercise to assess the effect of a hypothetical increase in unemployment on the financial health of the household sector. While arrears and bankruptcies have continued to rise since June, the start of the economic recovery has reduced the likelihood of this risk materializing in the near term. However, it remains a key source of vulnerability over time, given that the debt-to-income ratio is at historically high levels.

Written by Colin Henderson

December 10, 2009 at 12:36

Posted in Uncategorized

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