Canadian banking regulators are warning that the economy is not well prepared to face a recession due to high household debt levels.
In a report setting out its priorities for the next few years, the Office of the Superintendent of Financial Institutions says that the economic outlook for the major economies, including Canada, is “of concern, with a reasonably high probability that the U.S. recovery will continue to be weak, and some observers expecting a mild recession in Europe in 2012.” And, European sovereign debt worries remain too.
Moreover, OSFI says that the Canadian economy is also “less robust and less resilient to adverse shocks” compared to the last recession. It says that elevated household debt levels not only make households vulnerable to adverse shocks, but that continued low interest rates could also encourage even higher household indebtedness.
Yet, at the same time, OSFI says that consumers could help slow growth, “if they take action to rein in spending to address their indebtedness.”
On the regulatory front, OSFI says that it intends to actively participate in international and domestic discussions concerning regulatory reforms. It promises to create new standards for risk management, disclosure and corporate governance; and says that it will be paying particular attention to the effects of international accounting rule changes and of Basel III capital adequacy and liquidity requirements. It will also work on a credible resolution framework for major banks in Canada.
Additionally, OSFI says that it will develop, and begin implementation of, a public roadmap outlining the future state of insurance reforms, “bringing together different elements such as capital, accounting and supervisory changes so that implications for industry are more transparent and better understood.”
In particular, it aims to enhance the supervisory regime for insurance companies by implementing a new supervisory framework and revising domestic regulatory capital and other regulatory requirements and disclosures, it says.