The Bank of Canada released its review of the financial system Thursday and warned that it was important to remain vigilant to the risk of household indebtedness.

The bank said that while the mortgage stress test and interest rate hikes have slowed household borrowing and improved credit quality, there are still high levels of indebtedness and a large portion is held by households that are highly indebted.

However, it noted that the share of Canadians falling behind with credit payments is low and steady.

“New measures have curbed borrowing, reduced speculative behaviour in housing markets and made the financial system more resilient. While the fundamentals in the housing sector remain solid overall and the sector should return to growth later this year, we continue to monitor these vulnerabilities closely,” said BoC governor Stephen Poloz.

Another risk to the system

Governor Poloz highlighted rising risk to the financial system from corporate debt, especially among lower-rated companies.

He also said that assessment is needed of the risk from climate change.

The most important risks to Canada’s financial system remain a severe nationwide recession, a large house price correction and a sharp repricing of risk in financial markets.

But the BoC says its recent stress tests found that Canadian banks are in good shape to deal with these scenarios.

“Global uncertainty is rising, and risks to financial stability have edged up in the past year. Still, confidence in the resilience of Canada’s financial system remains high, and we are seeing improvements in some of the key vulnerabilities we’ve been worried about for many years,” said Governor Poloz