Fear of the impact of the global economic crisis could damage the financial system from the year, according to a survey by the Bank of Canada of banks, insurers, pension funds and other players on the market.
About 40 percent of respondents said they were afraid of deteriorating global economic conditions, compared to 25 percent in June, when the central bank conducted the first survey of the financial system.
"What research is triggering is what people read in the news," a Canadian reporter, deputy Governor of the Bank of Canada Carolina Wilkins, said on Wednesday. These reports include the rising tensions of the US and China, as well as economic struggles in Argentina, Brazil, Turkey and other emerging markets, she said.
Also great concern in financial markets is the possibility of increasing interest rates, as the Bank of Canada and other central banks are working to normalize credit terms after a decade of easy money.
Approximately a quarter of respondents said that growth of 1.5 to 2 percentage points in five-year government bond yields in the next 12 months would cause a deep correction of housing prices or a jump in loan defaults. Half of the respondents said that these types of shocks would "seriously jeopardize the Canadian financial system".
However, 95 percent of respondents said that such a magnitude velocity is unlikely. Most expected rates will increase by a maximum percentage point over the next year.
Governor of the Bank of Canada, Stephen Poloz, has promised in the past few weeks to raise the bank's main interest rate in the estimated neutral range of 2.5% to 3.5% over time. Neutral refers to the point where interest rates do not slow down economic activity or stimulate growth. Canada's key rate now stands at 1.75 percent, after five increases in the fourth spot since July 2017, leaving further 1.25 percentage points below the mid-target range.
The two-year research was based on the responses of 41 participants in the market, which were conducted between September 24th and October 12th.
Ms. Wilkins reiterated the central bank's view that Canadians generally adapt well to higher interest rates and recent moves to tighten federal and provincial mortgage rules.
"Loans – borrowing households – are slowing down," she said. "It seems to be getting tough on the way we expected."
Ms. Wilkins pointed to another report released by the bank on Wednesday, which shows a slowdown in mortgage activity and a sharp fall in the number of newly employed people in the long run since the end of 2016.
The share of new mortgages is considered high leverage – in which people borrow 4.5 times more annual revenues – fell to about 6 percent, which is less than 20 percent in 2016.
Also, on Wednesday, the Bank of Canada published a study on what would happen if national house prices fell by 20 percent, which could be reduced in Toronto and Vancouver.
"The rise in house prices has been significantly slowed down in these markets over the past year," the bank said. "Although house prices in these markets are supported by strong demand and limited supply, it's possible that price increases have partly led to unsustainable expectations of a steady rise in prices. If that is true, prices could be retreated quickly."
Despite recent refrigeration, prices in Toronto and Vancouver are still 40 percent and 55 percent higher than three years ago.
A 20 percent price correction would bring many homeowners and lenders under stress, the bank said, with effects of waves throughout the economy and the financial system.
Such a fall would be "nationally significant" because Toronto and Vancouver account for about half of the housing transactions in the capital cities of Canada, as well as "spilling" into other regional markets, according to the central bank.
However, the bank said that the probability of large-scale housing corrections remains low. And if this happens, the effects would not be large enough to trigger the withdrawal of funds or the sale of fire in large banks in the country owing to their international diversification and high retained earnings.
However, the Bank of Canada said that other financial institutions – especially those with a lot of unsecured mortgages – could be forced to undertake "corrective actions and reduce lending."
For banks of six, the main correction in house prices would send profits to 14 percent, trigger credit losses of $ 24 billion and hit 1.2 percentage points in comparison to average capital indicators, the central bank said.