MNI POLICY: BOC's FSR: Financial Risks Edged Up in Last Year

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada says risks to the domestic financial

system have increased slightly in the last year, but that it remains resilient.

     The risk of a severe domestic recession is increasing because of troubles

such as global trade protectionism and slower domestic growth, according to the

annual Financial System Review, which outlined potential dangers that aren't

part of the central bank's base-case economic forecast.

     The chance that global investors will re-price risk and drive up borrowing

costs is "moderate and increasing," while there is less chance of a domestic

slump in overheated housing markets.

     "Global uncertainty is rising, and risks to financial stability have edged

up in the past year," Governor Stephen Poloz said in the report from Ottawa

published Thursday.

     "Still, confidence in the resilience of Canada's financial system remains

high, and we are seeing improvements in some of the key vulnerabilities we've

been worried about for many years."

     The weak spots laid out in the FSR have previously influenced Poloz's

thinking about when to raise interest rates, balancing signs the economy has

moved closer to full capacity against consumers carrying record debt burdens and

struggling with higher mortgage rates.

     Significant vulnerabilities from high household debt and hot housing

markets such as Vancouver and Toronto have declined modestly over the last year,

in part because of tigher regulations. Fragile corporate debt markets, such as

energy companies taking on riskier debt, have emerged as a vulnerability. The

FSR report also added climate change as a stand-alone vulnerability, citing the

risks of physical damage and changes it would bring to companies and financial

markets.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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