Bank of Canada urges action to stem surging Canadian household debt

The Bank of Canada has called on Ottawa to do more to control households’ housing debt and to tackle the record terms of student loans

With economic fears and growing concern over Canadians’ wealth, the bank would like Ottawa to do more to curb the soaring debt levels of households, says its governor, Stephen Poloz.

“What would it look like to have rules explicitly focusing on debt, rather than on income? And that is something we would be supportive of,” Poloz said in an interview with the Globe and Mail.

The Bank of Canada’s repeated warnings about the country’s indebted households and unwieldy household debt have not come into effect. The bank’s governor said the “day is likely not far away” that they would introduce them, but could not offer a date for when it might happen.

What might those new rules be? The questions matter in a day when the Globe has reported on private investigator hires costing up to $50,000 to keep tabs on Canadians’ high-priced assets.

There is more coming on the horizon as the government is set to release a long-awaited framework for supervising the country’s lenders. The 11-month process will take banks through a steep learning curve about changes to how they do business, regulations and cultural transformations.

“I understand they are grappling with it,” said Poloz. “We’re bearing down on it. We know the testing is ongoing.”

Officials at the Office of the Superintendent of Financial Institutions [OSFI] are looking at new consumer lending proposals to curtail risky practices. The wide-ranging work is expected to find room for new consumer, securitization and securities regulations. The government was at pains to explain that while it favours a more stringent standard, there will not be a “one-size-fits-all” approach.

OSFI has already said it supports adding a consumer protection measure by the fall. It has also said it would close gaps in oversight in ways that benefit Canadians, such as standardising minimum “height and weight” standards for mortgage brokers, and that it supports provincial legislations to regulate mortgage brokers.

The thinking is that while government needs to closely watch the financial system, Canadians also need to be engaged. Experts want that federal framework and OSFI regulation to be informed by knowledge of the private marketplace.

The country’s Office of the Superintendent of Financial Institutions was a notable participant in the recent Libor scandal. Photograph: Mike Cassese/Reuters

Concerns over Canadians’ debt and property prices have also grown around the world. Poloz’s predecessor, Mark Carney, once told a panel that high household debt creates higher risk, and suggested there should be a renewed focus on its sustainability.

The UK has acknowledged similar concerns, leading the country to introduce proposals earlier this year to address household debt.

The Bank of Canada added further background to the critique as it released its latest quarterly review, highlighting a “persistent” deterioration in Canada’s inflation outlook. The bank said some of the most pronounced, and long-lasting, influences were “related to factors influencing the Canadian household sector.”

It identified affordability constraints on household debt and home prices, and a trend of growth in the household sector spread through more loan types, including non-traditional credit. These include auto and student loans. The bank repeated its forecast for inflation to hit 2% in the second half of the year before the higher heating costs begin to impact the household sector.

The bank has held rates steady since July 2017 and, unless there was any unanticipated and drastic news, will almost certainly wait until October to raise interest rates. Its next policy decision is on Tuesday 23 September.

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