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Bank of Canada: Financial System “Resilient” and Coping

Canada’s financial system “remains resilient” in the face of Covid-19 and the oil price shock, with support from Bank of Canada policy, and strong private capital and liquidity buffers, even as the economic outlook remains uncertain, the central bank said Thursday.

“Strong policies have put a floor under the economy and laid a strong foundation for its recovery,” the bank said in its quarterly Financial System Review.  “Concerted policy actions by the bank and other authorities have helped restore market functioning, and liquidity conditions have improved significantly.”

The bank added its operations helped restore liquidity in key funding markets, and functioning across financial markets.

Canada’s six largest banks, which account for the bulk of lending, were in a good position as the Covid-19 period began, with “strong capital and liquidity buffers, a diversified asset base, the capacity to generate income and the protection of a robust mortgage insurance system,” and the economy was strong, the bank said. “With these strengths, as well as the aggressive government policy response to the pandemic, the largest banks are in a good position to manage the consequences. Without the aggressive policy responses, banks would be faring much worse, with important negative effects on the availability of credit to households and businesses.”

Banks, asset managers, and the financial market infrastructure are all operating well and managing the challenges of elevated volumes, volatility, and other disruptions in the new operating environment, the bank said, noting the increasing role of asset managers in financing the Canadian corporate sector, as these funds now hold 23% of corporate bonds.

The bank repeated that the outlook for Canada’s economy remain “highly uncertain,” and noted its April Monetary Policy Report presented a range of possible scenarios, including a more pessimistic scenario in which containment measures continue into the summer. Under the more pessimistic scenario, the banking system remains in position to continue lending, it said.

“Bank of Canada staff analysed the resilience of the six largest banks in the more pessimistic scenario,” the report said. “This gives an indication of the banks’ capacity to support a challenging economic recovery. The unprecedented nature of the pandemic, however, makes the uncertainty around the results exceptionally high.

“In this scenario, policy actions combined with payment deferrals limit the rise in mortgage arrears,” it continued. “The scenario’s peak arrears rate of around 0.8 percent comes in the second half of 2021, when payment deferrals have expired but not all households have had their incomes fully recover. This peak is close to double the peak arrears rate in 2009.”

Canadian banks “have substantial capital and liquidity buffers. Combined with an aggressive public policy response, these buffers support the ability of banks to manage the economic consequences of COVID‑19. This allows them to continue lending to households and businesses.”

Colin Lambert

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