World’s Soundest Banks no Immunity for Risks in Canada

June 10, 2014 Bloomberg Businessweek

June 10, 2014

By Greg Quinn

Even with the world’s soundest banks, Stephen Poloz is grabbing a microphone to warn about risks to Canada’s economy.

The Bank of Canada governor, along with new Senior Deputy Governor Carolyn Wilkins, is taking the unprecedented step of holding a press conference June 12 after publishing the Financial System Review, a previously low-profile report that documents threats to the country’s economy and banking system.

By boosting the report’s visibility, Canada’s central bank is aligning itself with counterparts such as the Bank of England and European Central Bank, which were affected more directly by the global financial crisis. The press conference gives Poloz the chance to talk about economic threats facing Canada, including the risk of low inflation he flagged in last week’s interest-rate announcement.

“It’s all about transparency these days and central banks have been under fire” for catching people off guard, said Randy LeClair, senior money manager at Manulife Asset Management in Toronto, who helps oversee C$17 billion ($15.6 billion) of assets. LeClair says the Bank of Canada has done “an outstanding job” of avoiding surprises.

In the last report, issued in December, the central bank named the build-up of consumer debt — reflected in condominium markets in Vancouver and Toronto — as the biggest domestic threat to Canada’s economy and its banks. While Poloz has predicted a “soft landing” in the housing market, realtors in Toronto reported the average home resale price rose 8.3 percent from a year earlier in May, while the country’s housing agency said yesterday that construction starts unexpectedly accelerated last month.

Inflation Risk

Economists and investors will also look for comments about the risk of low inflation, cited by the Bank of Canada in last week’s interest-rate announcement, when policy makers held the benchmark rate at 1 percent for the 30th consecutive meeting.

Even with inflation rising to the bank’s 2 percent target in April, last week’s statement reiterated that “the downside risks to the inflation outlook” are “as important as before.” Those topics will be tracked by investors including Scott Smith, senior foreign exchange trader and market analyst at Cambridge Mercantile Group in Calgary.

“From a market perspective it adds another layer of transparency on the Bank of Canada’s thought process,” Smith said in a telephone interview. The U.S. Federal Reserve still has a greater number of public appearances by policy makers including Chair Janet Yellen and members of the Federal Open Market Committee, he said, with Canada “pretty close to being on par.”

The press conference, scheduled for 45 minutes after the 10:30 a.m. Ottawa time publication of the report known as the FSR, will be Poloz’s first appearance since April 30, and also marks the public debut of Wilkins in her new role since taking over from Tiff Macklem.

‘Rough Read’

“Making the governor available to explain some of the concepts and answer questions will help Canadians better understand some of these issues,” said Derek Burleton, deputy chief economist at Toronto-Dominion Bank. “Even for economists, the FSR can be a bit of a rough read.”

The FSR features a four-level, color-coded assessment of the threats facing the economy as judged by the bank’s six-member Governing Council. The last report, on Dec. 10, reduced the risk level facing Canada one notch to “elevated,” the second-lowest level, from “high.”

Canada’s currency has depreciated 6.5 percent against the U.S. dollar over the past six months, the worst performer of 10 major currencies tracked by Bloomberg. The country’s benchmark Standard & Poor’s/TSX Composite Index has risen 6.6 percent so far this year in U.S. dollar terms, outperforming the 5.6 percent gain in the Standard & Poor’s 500 Index. Canadian government bonds have returned 3.4 percent so far this year through June 6, compared with a 2.7 percent gain for U.S. Treasuries, according to Bank of America Merrill Lynch Indexes.

Soundest Banks

With threats easing, and given the country’s status as having the world’s soundest banks for six straight years according to the World Economic Forum, the Geneva-based institution that promotes public-private cooperation and hosts an annual meeting in Davos, it may seem an odd time for Poloz to give the FSR such a high profile.

“The financial crisis highlighted the importance of constant vigilance with respect to financial stability,” central bank spokesman Alexandre Deslongchamps said in an e-mailed response to questions about the higher profile for the FSR. The measures represent an “additional step in helping Canadians better understand the forces at work in the economy.”

Risk Management

Poloz, 58, who took over as governor from Mark Carney a year ago, has repeatedly stressed his view of monetary policy as a “risk-management” exercise, devoting a speech to the topic in December. Setting interest rates isn’t just a matter of letting precise models dictate policy, he said. It’s more a matter of weighing risks to both the economy and the financial system.

“While we examine the two sets of risks from different perspectives, we take into consideration the interplay between them,” Poloz said at the time. “Pursuing economic stability without due regard for financial stability risks achieving neither.”

Those risks include potential spillovers from Europe’s debt crisis should it worsen, and the possibility that global investors could take on excessive risks given persistent low interest rates.

Today’s emphasis on risks stands in stark contrast to the bank’s first FSR, published in 2002. In that document, the bank took pains to separate discussions of interest rate and financial system policies.

Twelve years, two governors and a financial crisis later, the bank is drawing a much tighter link. “Economic stability and financial stability are interrelated, so any risks to either must be considered in an integrated fashion,” it said in the last FSR.

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