The Bank of Canada raised rates at a record pace over the past year to tame inflation that touched a four-decade high in June. The bank has left its key policy rate at the 15-year high of 4.50% in its last two policy meetings to allow the effects of policy tightening to sink in.
"The steep increase in interest rates has eroded debt affordability," OSFI said in the report. "Mortgage holders may not be able to afford continued increases on monthly payments or might see a significant payment shock at the time of their mortgage renewal, leading to higher default probabilities."
OSFI will issue draft guidance on debt management measures designed to better control risk from high levels of consumer indebtedness and examine ways to increase credit quality and mortgage underwriting at federally regulated financial institutions.
The regulator is assessing the risks posed by variable rate fixed mortgages.
Other financial system risks include "growth and uncertainty" in unregulated non-bank financial institutions that could threaten the broader financial system under conditions where markets are volatile of falling, the regulator said.
Such non-bank financial entities have different business models, balance sheets and governance structures and include investment funds, insurance companies and pension funds.
Aside from non-bank entities, OSFI warned about climate-related risks, such as weather events, and knock-on effects from the country moving toward a low greenhouse gas-emitting ecnonomy.
OSFI plans to collect, analyze and disclose new climate risk data.
Other financial systemic risks include cyber attacks and
risks from emerging technologies.
(Reporting by Maiya Keidan and Ismail Shakil; editing by
Jonathan Oatis)
