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Persistently high household debt remains a key threat, Bank of Canada says

Bank of Canada senior deputy governor Carolyn Wilkins. (File)


Canada's persistent high household debts remain a key potential threat to Canada's financial stability, despite policy changes aimed at cooling the threat, the second-in-command at the Bank of Canada says.

Senior deputy governor Carolyn Wilkins added that the hard-to-quantify risks from cyberattacks are emerging as a newer worry for the central bank as it looks to address future vulnerabilities to the country's financial system, a decade on from the hard lessons of the global financial crisis.

"We've accomplished a lot. But let's face it, the job's not done," she said in a speech on Thursday in Toronto.

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Ms. Wilkins made her remarks at the University of Toronto's Rotman School of Management, as part of a conference titled Are We Ready For The Next Financial Crisis? In the audience question-and-answer period following the speech, Ms. Wilkins identified the country's household debts – long a bane for the Bank of Canada in the postcrisis recovery – as still the No. 1 worry that keeps her up at night.

"Things seem to be going in the right direction," she said of measures taken by both the central bank and government regulators to reduce the potential risks posed by household debts. "At the same time, that vulnerability is still there, and would be a factor if the Canadian economy were to be hit with an adverse shock."

In the years since the 2008-09 financial crisis and Great Recession, the Bank of Canada has come under criticism in some quarters for maintaining a policy of extremely low interest rates in the name of stimulating an economic recovery, even as these low rates provided the fuel for regional-housing bubbles and an unprecedented swelling of household debts. Last week, Statistics Canada reported that Canada's ratio of household debt to disposable income – the most closely followed gauge for consumer debt burdens – stood at 170.4 per cent in the fourth quarter, just a shade below the record 170.5 per cent in the third quarter.

Ms. Wilkins noted that the introduction by the federal government of tighter mortgage rules appear to be helping improve the "quality of debt," while the three interest-rate increases the Bank of Canada has announced since last July, which raised its benchmark rate to 1.25 per cent from 0.5 per cent, should also help cool the debt situation. She noted in her speech that with solid growth in the Canadian economy over the past year now having lifted it close to full capacity, the central bank has been able to align its interest-rate policy to address both its economic and financial-stability priorities – something it couldn't do in earlier stages of the postcrisis recovery.

"Monetary-policy actions to achieve the inflation target and support financial stability are currently complementary," she said.

"There is nonetheless a fine balance to strike here: While moving too slowly would allow more time for financial vulnerabilities to build, moving too quickly could have outsized effects, especially given the high level of household indebtedness," she said.

"We're looking to see what the effect of [the three rate hikes] will be on households," she added in the postspeech Q&A.

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Ms. Wilkins also listed the threat of cyberattacks as a major source of concern, echoing a top worry identified by her boss, Bank of Canada Governor Stephen Poloz, in a speech he gave last December in which he discussed the three long-term issues "keeping me awake at night." Indeed, cybersecurity was a major theme of her speech.

"When it comes to cyberrisk, and many other operational risks, we are all connected," she said in her prepared speech. "Cyberrisk is heightened … because of an increasing number of points of access to core parts of the financial system, and the growing sophistication of those launching cyberattacks."

"The systems that underpin all financial transactions in our economy are highly interconnected, and a cyberattack on one could quickly propagate and cause major disruptions."

"We are working with Payments Canada and the six largest Canadian banks to reduce the chance of a serious cyberevent, and to mitigate the impact and recover quickly if such an event were to materialize," she said.

Ms. Wilkins added that the emergence of cryptocurrencies – which she referred to as "crypto-assets," as the Bank of Canada considers them an investment security rather than a form of money – are another issue that central banks and financial regulators need to address.

"The crypto-world is moving fast, and is largely unchecked," she said. "Authorities should work toward a coherent set of policies for crypto-assets that is aligned internationally."

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