TORONTO, April 18 (Reuters) - A potential downturn in Canada's housing market and adjusting to rapid increases in interest rates are among the biggest risks to Canada's financial system this fiscal year, the country's financial regulator said on Tuesday.
The Office of the Superintendent of Financial Institutions (OSFI) said it was ensuring that federally regulated financial institutions were alert to changing market conditions in its first annual risk outlook report for the year ending March 31, 2024.
"OSFI is preparing for the possibility, but not predicting, that the housing market will experience sustained weakness through 2023," said Peter Routledge, superintendent at OSFI.
The regulator also said the adjustment to higher interest rates "may not be completely smooth" and that it was intensifying monitoring of market liquidity.
The Bank of Canada raised rates at a record pace over the past year to tame inflation that touched a four-decade high in June. The bank has left its key policy rate at the 15-year high of 4.50% in its last two policy meetings to allow the effects of policy tightening to sink in.
"The steep increase in interest rates has eroded debt affordability," OSFI said in the report. "Mortgage holders may not be able to afford continued increases on monthly payments or might see a significant payment shock at the time of their mortgage renewal, leading to higher default probabilities."
OSFI will issue draft guidance on debt management measures designed to better control risk from high levels of consumer indebtedness and examine ways to increase credit quality and mortgage underwriting at federally regulated financial institutions.
The regulator is assessing the risks posed by variable rate fixed mortgages.
Other financial system risks include "growth and uncertainty" in unregulated non-bank financial institutions that could threaten the broader financial system under conditions where markets are volatile of falling, the regulator said.
Such non-bank financial entities have different business models, balance sheets and governance structures and include investment funds, insurance companies and pension funds.
Aside from non-bank entities, OSFI warned about climate-related risks, such as weather events, and knock-on effects from the country moving toward a low greenhouse gas-emitting ecnonomy.
OSFI plans to collect, analyze and disclose new climate risk data.
Other financial systemic risks include cyber attacks and risks from emerging technologies.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Exclusive Capital communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.