REPEAT: MNI 5 THINGS: BOC FSR To Show Debt, Housing Issues

Repeats Story Initially Transmitted at 19:55 GMT Jun 6/15:55 EST Jun 6

--5 Things To Look For In The BOC Financial System Review

By Yali N'Diaye

     OTTAWA (MNI) - The Bank of Canada will release its semi-annual Financial

System Review Thursday, providing an analysis of the financial system

resilience. Ahead of the release, we highlight five themes for particular

attention:    

--CREDIT GROWTH SLOWING

     In its November 2017 Financial System Review, the Bank of Canada again

identified household debt and imbalances in the housing market as key

vulnerabilities of the Canadian financial system.

     The central bank has already warned that a reduction in household debt

would be a long-term process, but has recently highlighted that household credit

debt growth has slowed.

     Mortgages are a significant part of household debt, and the BOC expects

tighter mortgage underwriting rules in place since January to improve the

composition of household debt, with Governor Stephen Poloz noting in a May 1

speech that "we are already seeing a significant reduction in the issuance of

very high loan-to-income mortgages."

     Nonetheless, the sheer level of household debt leaves it as a key

vulnerability to the financial system. But given the credit growth slowdown

pointed out by the BOC, it will be interesting to see whether the risk of a

severe recession leading to financial stress, with household and housing market

vulnerabilities interacting to create stress for lenders continues to decrease.

In November, such risk was "elevated but decreasing."

--HOUSING IMBALANCES

     Since the introduction of new mortgage underwriting rules, housing

activity, especially home resales, has slowed, and the BOC continues to monitor

the sector's adjustments to rising interest rates and tighter mortgage rules.

     In November, the BOC deemed the risk of a housing price correction in

overheated markets - namely Toronto and Vancouver - "moderate."

     Further price declines have occurred since then, notably in the Greater

Toronto area, and it remains to be seen how the BOC will interpret recent

housing data.

     In its Article IV mission statement on June 1, the International Monetary

Fund said "current measures appear to be containing housing-related financial

sector risk."

     "Nevertheless, the banking system remains highly exposed to household debt

and vulnerable to a sharp reversal in house prices," the IMF added.

--CYBERSECURITY, CORPORATE DEBT

     In its November FSR, the BOC also cited cyber threats as a top financial

vulnerability, and given the long-term nature of the related issues, it is

likely to remain a key vulnerability in Thursday's FSR.

     However, the BOC also cited corporate debt last November, although it

deemed non-financial firms had enough cash buffer to meet short-term

obligations. Non-financial corporate debt-to-GDP growth accelerated in 2014 as

the Canadian economy face the oil price shock.

     Yet, the BOC staff published a research note Wednesday that found that

"developments in the oil and mining sectors have had a noticeable impact on

aggregate nonfinancial corporate indebtedness and other vulnerability

indicators."

     Excluding oil and mining, the aggregate corporate debt-to-income ratio is

actually "within historical ranges."

     So the BOC's take on corporate debt Thursday will also be worth watching.

--EMERGING MARKETS

     Among the four main risks to the financial system identified by the BOC in

November was also stress emanating from China and other emerging market

economies.

     Since then, emerging markets have been under further stress with the U.S.

dollar appreciation since the beginning of this year despite the recent USD

weakening.

     Non-resident portfolio outflows from emerging markets accelerated to USD

12.3 billion in May from USD 0.3 billion in April, the Institute of

International Finance reported Tuesday.

     It estimated that a 10% U.S. dollar appreciation would cut annual net

capital inflows to emerging markets by USD 95 billion.

     In developed markets, political developments in Italy could also bring back

some focus on Europe in the FSR.

--GLOBAL RATES

     The risk of a sharp increase in global interest rates was also identified

in the November FSR.

     With the European Central Bank on its way to joining the Fed in further

policy normalization, any policy mistake remains a possibility.

     Changes in global growth and inflation prospects also remain on the radar.

However, the BOC said in its May policy statement that global growth remained on

track with its April forecasts.

     The risk of a sharp global interest rate increase was moderate but

increasing in November. 

     It will be interesting to see if and how the BOC factors in trade-related

developments in that context.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com