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Canada has been notified by a global banking body regarding the vulnerabilities tied to the rising interest rates, property prices, and credit. The Bank for International Settlements also known as BIS published their quarterly review, and declared that Canada showed early warning signs for domestic banking risks and financial crisis. The report was completed by measuring housing prices and credit in relation to gross domestic product, and the ability to service debt in the face of increasing rising interest rates in the country.
The credit gap for Canada has risen from last year, and it currently has the highest credit-to-GDP ratio in developed nations. The report stated that this unusual elevated level would be a massive threat to the banking system of the country. The report also notes that around two-thirds of the banking crisis in the world was after credit-to-GDP gaps that were above the 10% threshold. Countries like Portugal, Japan, Greece, and Eastern Europe were placed in the same category, but the property price gaps in those countries weren’t rising due to price growth.
The report showed that the debt ratios were manageable for most companies, if there is no change in interest rates, but Canada, alongside Turkey and China were placed under ‘potential risks’, as they had been under more stressful conditions. This will mean that the debt service ratio for Canada will increased to around 8 from 3.6, which would only be behind China.
The Bank of Canada conducted a year-end-review and highlighted these vulnerabilities, which would imbalance the housing market, and increase household debt all over the country. However, the report also stated that these vulnerabilities will alleviate over time, and conditions will improve when the new housing finance rules will be introduced for Canada.