MNI POLICY: BOC: Consumer Finances Holding Up on Relief Moves

By Greg Quinn

     OTTAWA (MNI) - Canada's housing market and consumer finances are holding up

as policy actions bridge incomes and keep credit flowing, the central bank said

Thursday.

     Regulators and banks have allowed 700,000 mortgage deferrals over a period

of six months and flexibility on other consumer credit lines. After that time

there will likely be a further rise in the share of highly indebted households,

the Bank of Canada said, but even in its downside scenario from April where GDP

falls as much as 30% in the first half of this year, the damage to banks from

consumer finances may be limited, with the arrears rate potentially rising to

0.8% next year.

     "The longer the income shock lasts, the greater the risk of a rise in

consumer insolvencies," the BOC's Financial System Review said.

     The BOC said actions like the tripling of its balance sheet can be adjusted

as needed and federal government programs can be boosted the same way.

     While 0.8% would still be double the arrears rate from the last recession

in 2009, it's a relatively happy outcome in a nation that faced years of

warnings from the IMF and global investors about a potential housing crash in

Toronto or Vancouver as households chased after million-dollar homes. Governor

Stephen Poloz earlier warned about frothy housing markets and warned buyers

about the temptation of big debts amid historically low interest rates.

     There has been a hit to housing resales, the BOC said, and "reduced

liquidity in the housing market could add pressure to household finances since

households may find it increasingly difficult to sell their homes."

     The biggest source of credit losses now may be business loans, according to

a BOC simulation of a downside economic scenario including the actions of policy

makers so far.

     "In the 'With policy' scenario, business loans are the biggest contributor

to credit losses, and market losses also reduce capital. Losses from household

lending are less pronounced. Still, losses on consumer loans such as credit

cards are high compared with residential mortgage portfolios, which are

protected by collateral and, in some cases, mortgage insurance," the BOC said.

     Other report highlights:

     *Key fixed-income markets have improved since the BOC and other agencies

stepped in when they showed signs of strain earlier this year and "many of the

programs are now being used less than they were at inception."

     *"We will continue to assess the impacts of these measures and can adjust

the scale of these programs as market conditions change."

     *"Canada's key financial institutions are strong enough to deal with these

challenging conditions, including operational disruptions."

     *Corporate financing faces risks from potential credit rating downgrades,

and the energy industry is most vulnerable.

     *The BOC lauded the key role of fiscal relief in sustaining the economy:

"During this period, emergency measures that provide basic incomes to households

and help businesses access credit are crucial."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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