Bank of Canada Deputy Downplays Risks of Consumer Default Wave
Canadian Financial System Remains Resilient, Gravelle Says
(Bloomberg) -- The massive policy response from the Bank of Canada and the federal government successfully prevented the country’s financial system from buckling, though vigilance is still needed, according to a top central banker.
Signs of overwhelming financial strain are few, and the risk of a wave of consumer defaults seems low, Deputy Governor Toni Gravelle said in remarks via video conference to the Autorite des marches financiers. Almost all of the households with expired debt deferrals have resumed repayments, and government measures are helping businesses in many sectors manage cash flows, he said.
“We have long warned that a recession could create broad stress across the financial system,” Gravelle said in a semi-annual update on vulnerabilities in the financial system. “Yet, despite the devastating economic impact of the pandemic, this risk has not -- as of yet -- materialized.”
The speech paints a reassuring picture of Canadian consumers and companies emerging from the unprecedented shock in decent shape, in spite of elevated debt levels. It also casts the central bank’s own response as largely successful in averting the worst effects of the crisis, though Gravelle said the pandemic remains a source of “considerable financial system risk.”
The deputy governor downplayed signs of overheating in the nation’s housing market, hinting the recent surge in prices reflects fundamental factors such as pent-up demand and a shift in preferences to larger homes. Values have risen fastest, meanwhile, in cities with moderate mortgage levels.
“To this point, we do not see signs that home prices are rising due to speculation, like we saw in the greater Toronto and Vancouver areas a few years ago,” he said. At the same time, he cautioned about the need to be vigilant in certain segments of the market such as condos.
Gravelle added, however, that it’s too soon to declare victory, in particular because many mortgage deferrals only ended in October, meaning the full effects may not be known until the end of the year or early 2021.
He was less sanguine on the prospects for business, which he said may need more financing in the near term to get through a bumpy recovery. That’s why the central bank is ready to support the financial system if needed, even though it has recently pulled out of some programs.
“We expect that an increasing number of businesses will need financing in the coming quarters to get by,” he said. “Staff will be conducting simulations using firm-level data to quantify this, and we plan to publish those results in the next couple of months.”
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