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Canada's risk of financial stability is higher, but system is more resilient: bank

Xinhua, June 12, 2015 Adjust font size:

The overall risk to financial stability in Canada has risen in the face of lower oil prices, but the resilience of the system continues to improve, according to the 2015 June Financial System Review (FSR) issued by the Bank of Canada Thursday.

The biannual FSR is intended to raise awareness of the key vulnerabilities, possible triggers and risks to the financial system.

The bank's assessment is that there is a low probability that the risks identified in the June review will materialize. Policies and regulations are in place to promote the strength and soundness of the Canadian financial system.

Elevated household indebtedness remains an important vulnerability in the financial system, as it was at the time of the 2014 December FSR. Imbalances in the housing market, which are closely related to the state of household finances, are another key concern highlighted in the report.

The vulnerabilities described in the June review could amplify and propagate shocks throughout the system if an event were to trigger any of the four major risks to financial stability. The most important domestic risk is a broad-based decline in employment and incomes that would significantly reduce the ability of households to service their debt, leading to a widespread correction in house prices.

The oil price shock has increased the risk to financial stability, the June review says, by delaying improvements to incomes and economic growth and impacting the housing markets of oil-producing regions. However, the decline in oil prices alone is unlikely to trigger a material risk to the system as a whole. The bank continues to expect the imbalances in the household sector and housing market to ease as the economy improves.

The other key risks identified in the review are sharply higher long-term interest rates, globally and in Canada; stress emanating from emerging-market economies; and financial stress from the euro area. Endite