Canada is at risk of a banking crisis

Bank for International Settlements warns that high household debt could be a threat to Canada's banking system

by Vanmala Subramaniam
Mar 12 2018, 4:06pm

Canada is among one of three economies in the world that is most at risk of a banking crisis, according to a new report by the Switzerland-based Bank for International Settlements (BIS). The report points towards excessive consumer debt levels amongst Canadians — particularly credit card spending — as a red flag on the state of the wider economy.

In 2017, Canada’s economy grew at its fastest pace in six years, driven by high consumer spending particularly in the property sector. In the first three months of 2017 in fact, property prices in Toronto rose at unprecedented rates — an average of 25 percent each month between January and March.

The borrowing habits of Canadians has put our household debt levels at record highs, something that the BIS notes is an “early-warning indicator” that our banking system could be facing a looming crisis. We are currently the most indebted developed country in the world — for every dollar of household disposable income, there is $1.68 in credit market debt.

China and Hong Kong also stood out as economies at risk of a banking crisis, with both nations charting a credit-to-GDP gap — the risk associated with credit given to households and businesses in an economy — that could eventually pose problems for the banking system. “For Canada and Hong Kong, these signals are reinforced by property price developments,” the report noted.

Canada’s economy will slow in 2018

Meanwhile, a separate report from the Royal Bank of Canada’s economic team is saying that Canada’s economy is expected to slow in 2018, specifically because of interest rate hikes and a drop in consumer spending. The Bank of Canada has raised interest rates three times over the last six months, a policy decision fuelled by steady economic growth and a decrease in the unemployment rate.

But as the cost of borrowing goes up, consumers will inevitably seek out less debt, leading to a decline in the spending rate. A rise in interest rates has also sparked concern over Canadians’ ability to meet their monthly mortgage payments. The average Canadian holds roughly $200,000 in mortgage debt, and $8,500 in other kinds of consumer debt, according to a recent assessment by credit monitoring firm TransUnion.

Although mortgage delinquency rates are still low — less than 0.2 percent in most major Canadian cities, Canadians have racked up thousands of dollars of debt through credit cards and HELOCs, home-equity lines of credit that often come attached to a mortgage. Defaulting on a mortgage, say some experts, is the “last thing to slip” when your finances get tight, simply because you have access to so many other forms of debt.

Other interesting points to note in the RBC report — the Canadian dollar will probably hover at 78 U.S. cents throughout 2018, before strengthening to 82 U.S. cents by the end of the year. Meanwhile, oil-producing provinces like Alberta and Newfoundland & Labrador will continue to face “significant budgetary shortfalls” for the rest of the year, as oil prices, and hence royalty revenues, remain low.

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