The foundation of Canada’s financial system has a few cracks, but it’s holding together
A prime concern is whether regulators can ward off threats, Kevin Carmichael writes.
The Bank of Canada’s latest inspection of the financial system notes the usual structural weaknesses, or “vulnerabilities,” as the central bank prefers to call them.
Household debt still is so high that we’d be in trouble if something bad happened, such as a global trade war that crippled demand and sunk commodity prices. And real estate prices in some places are still so extreme that we could be the cause of our own downturn; house-poor consumers could stop shopping, or a sharp drop in home values might leave households with debts that exceed the value of their assets.
Still, the Bank of Canada wants us to lose only a little sleep over these scenarios.
As long as incomes grow faster than credit, as they have begun doing, policy-makers are fairly confident that a financial crisis will be avoided. They got some good news in this regard on Thursday when Statistics Canada reported that households’ creditmarket debt was 168 per cent of disposable income in the first quarter, an eye-watering figure, but down from 170 per cent at the end of 2017 thanks to rising incomes.
That same report said the ratio of debt-to-assets was 16.6 per cent, compared with a quarterly average since 1990 of 16.2 per cent. From that perspective, Canadians are no more stretched now than they have ever been.
So, the foundation of the financial system is under stress, but it’s holding together.
But what about termites and other pests that lurk behind the walls and under the floorboards? These could be the real threats. I’ve lost track of how many times over the past decade that I’ve heard a policy-maker or some expert say that we won’t see the next crisis coming.
That’s certainly possible in Canada, where the odds are higher that someone is asleep at the switch simply because we have so many switches.
There is no arm’s length agency with responsibility for the financial system because the members of Parliament who end up running the Department of Finance keep thinking that they are up for the task. And the refusal of provinces to let go of oversight responsibilities that should be done by a national authority increase the likelihood that troubles go unseen or unchecked.
Last week, a judge in Quebec threw out the insider trading case against David Baazov, the founder of the Montreal-based company that bought PokerStars, not because Baazov and his coaccused proved their innocence, but because the provincial securities regulator’s mishandling of privileged documents risked the integrity of the legal process.
Mistakes happen. Still, the failure of the Autorité des marchés financiers to execute a highprofile charge of insider trading was only the latest reminder that Canada’s system of 13 provincial and territorial securities regulators is only as strong as its weakest link.
The issue has become bigger than asset trading. One of the reasons the central bank is less worried about a financial crisis is the new OSFI requirement that banks ensure mortgage borrowers could handle payments at higher interest rates. This should strengthen the system by reducing the number of debtors who are on the edge of bankruptcy.
Naturally, those who fail the stress tests will seek loans elsewhere. Credit unions have been gobbling up new business, but OSFI has no control over them because they fall under provincial jurisdiction. So far, only Quebec demands that its credit unions follow the federal standard. The gap in regulation, “could make the new guideline less effective in mitigating the vulnerability for the financial system as a whole,” according to the FSR.
Perhaps an even greater concern is whether all these authorities can get their acts together in time to significantly reduce the threat that a cyberattack could paralyze the financial system.
We obsess daily about house prices, but Poloz and the banks fear malevolent hackers just as much, if not more. “Attempted cyber attacks are frequent and come from a variety of sources,” the FSR said. “Even as defensive capacity improves across the financial system, some attacks will inevitably succeed.”
Authorities will tell you that they are on top of this threat, and maybe they are? Public Safety Minister Ralph Goodale this week released the Trudeau government’s National Cyber Security Strategy, the first update since 2010.
Yet the document is vague. It promises that the federal government will lead the “development of a national plan to prevent, mitigate and respond to cyber incidents.” That’s important because there is no clarity about who’s in charge of this file. But it’s not entirely comforting, as it suggests there would be total confusion if such an incident were to occur tomorrow.
It’s telling the Bank of Canada has taken it upon itself to raise the alarm, which it did six months ago in its previous FSR. Yet the central bank only has direct control over the payments system. What if a bank falls? Or what if an assessment of the readiness of other aspects of the financial system is needed?
Who knows? But don’t fear: any number of federal departments, federal agencies, provincial departments, provincial agencies, and committees of private stakeholders are working on it.