Here's more evidence that the sub-prime crisis will not have much effect on us here in Canada. You can thank Canada's regulated financial system system that didn't allow sub-prime mortgages and 100% financing for keeping us in good stead. Then again, is it really worth the years of sub-standard customer service from the big banks?
I'd love to hear your thoughts.
Consumers, banks to feel pinch
OTTAWA — The global credit crunch has not hampered credit growth in Canada, but banks and household finances will likely feel pinched in coming months, the central bank says in a new assessment.
Global credit markets are still under stress, and spreads won't recede much until well into next year, the Bank of Canada said in its twice-yearly Financial System Review, and both the banking system and consumers remain vulnerable.
“Although there has been some improvement in conditions over the past several weeks, strains in global credit markets have broadened since December,” the review said.
Canadian banks have generally remained solid throughout the past 10 months of turmoil, and are able to tap markets to finance their shortfalls. Plus, they have continued lending to Canadian borrowers, albeit with different types of credit instruments that generally cost borrowers more.
But bank balance sheets “may experience further pressure,” the review stated.
That's because banks in Canada are more exposed to U.S. assets than banks in any other country. And the United States continues to have significant problems, both in financial markets and in its economy.
So Canadian banks will likely see their profits squeezed further, the review warned. Revenues from investment banking will likely fall, since the lucrative securitization market is not functioning. Loan-loss provisions are on the rise. And the financial position of Canadian households and businesses outside the finance sector is deteriorating.
Indeed, Canadian consumers are increasing their household debt levels, and finding that debt more expensive to service, the review showed.
Debt as a proportion of income has climbed steadily for the past 20 years, and now, debt is 131 per cent of income, the review points out.
At the same time, higher mortgage rates have pushed up the cost of carrying a growing debt load. The debt-service ratio was 7.7 per cent at the end of 2007, compared with 7.3 per cent in the middle of last year, just before the credit crisis erupted.
And the number of vulnerable households, with very high debt-service ratios, has climbed recently.
As the housing market comes off its recent highs, Canadian households are poised to feel a bit poorer, especially in Western Canada, the review warned.
“With possible further decreases in financial asset prices and continued slowing in house price increases, the financial position of the Canadian household sector is likely to deteriorate going forward.”
Still, the Bank of Canada is not too concerned. Net worth rose 6.4 per cent in the second half of 2007. Loans in arrears are still at historically low levels. And the personal bankruptcy rate is stable.
“Aggregate indicators of household financial stress continue to suggest that the Canadian household sector is in good financial health,” the bank says.
Consumers and banks are well positioned to handle a bit of deterioration, the central bank said, but their mild discomfort will quickly become intense pain if the U.S. downturn turns into a protracted recession.
That probably won't happen, the bank added, but if it does, the implications for Canada are major.
A long U.S. recession would bite into financial market liquidity again, and force another round of de-leveraging, as well as a “sharp” drop in the U.S. dollar. The effects would spill over into the rest of the world through trade and through financial markets. Commodity prices would be vulnerable.
For Canada, this scenario would mean lower profits for exporters and a spill-over effect on the broader Canadian economy. Banks would have to take further writedowns, while their loan losses would rise, and their capital ratios would be hard hit.
Credit conditions for Canadian businesses and consumers would tighten significantly, defaults would rise, and consumer wealth would drop, especially in the West.
“While the probably of such outcomes materializing is relatively low, they nonetheless warrant careful consideration by financial institutions because of the potentially large negative repercussions,” the central bank said.
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