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--Risk To Canada's Financial System From Global Outlook Rises
--More Respondents To BOC Survey Concerned by Rising Interest Rates
By Yali N'Diaye
OTTOWA(MNI) - The perceived risk to Canada's financial system stemming from
a deterioration in the global economic outlook has increased from last spring,
according to the Bank of Canada's semi-annual Financial System Survey of
financial market participants, which also showed rising concern over higher
The survey of 41 senior level experts in risk management within the
financial system published Wednesday showed nearly 38% cited a deterioration in
the global economic outlook as a top risk to the country's financial system
stability, up from 25% in the spring survey.
BOC Senior Deputy Governor Carolyn Wilkins told reporters that the
respondents' answers might have been affected by negative developments reported
in the news, such as the escalation of trade tensions between the U.S. and
China, or heightened financial stress in Argentina and Turkey.
Overall, the BOC sees the global economy growing at a pace that is "quite
consistent with what we think is the pace of potential," Wilkins said.
Respondents remain generally highly confident in the resilience of Canada's
financial system despite the fact that the perceived risk has "increased
somewhat over the past six months."
Potential cyberattacks remained the number one risk, and those surveyed
also saw an increased risk from a reduction in market liquidity.
--INTEREST RATE RISK
While survey participants were wary of a deteriorating outlook, they were
also more concerned about rising interest rates.
Nearly 13% of respondents cited rising rates as one of the top risks to the
financial system stability in the Fall survey. In the Spring survey, conducted
between March 26 and April 9, 2018, respondents were more concerned about the
risk stemming from a low interest rate environment.
An increase in 5-year Canadian government bond yields of 50 basis points to
150 basis points over the next 12 months would trigger a Canadian equity market
sell-off of 20% or more, most respondents said.
While a jump of 150 basis points or more over the next 12 months is seen as
"very unlikely", with only a 5% chance of such a scenario materializing, its
consequences could be serious.
If the 5-year bond yield rose between 150 basis points and 300 basis
points, most expect a house price correction of 20% over two years. Should the
increase be at least 300 basis points, most respondents expect an increase in
- LOWER RISK FROM HOUSING
Only 20% of respondents consider a housing correction as a top risk, versus
30% in the spring.
If house prices fell 20% on average nationwide over an 18-month period, led
by Toronto and Vancouver, BOC staff found that Canada's GDP growth level would
be cut by 5% relative to a base case scenario over two years.
Taking the base case scenario included in the BOC's monetary policy report,
this would send the Canadian economy into recession, with an annual contraction
of 1% over two consecutive years.
The probability of this scenario, however, is "rather low." In addition, a
staff study showed that against the backdrop of tighter macroprudential and
monetary policies, the quality of mortgage lending has improved.
The survey showed a lower percentage of respondents saw international trade
disputes as a top risk, with the percentage concerned falling to 8% versus 19%
in the spring.
The survey was conducted from Sept. 24 to Oct. 12, a period which included
the announcement of the United States-Mexico-Canada preliminary trade agreement
on Sept. 30.
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