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Canada's Financial System Facing Greater Risks From Fiscal Strains: BOC

Canada’s financial system faces a higher level of risk because of global strains, including concerns that countries are taking on too much debt and an unbalanced economic recovery, the country’s central bank said.

Three of five major risks have increased since December, while one was unchanged and one decreased, the Bank of Canada said today from Ottawa in its Financial System Review. The higher risks come despite signs of a recovery in the country’s economy and the little impact felt by local banks so far from concerns about high debt levels abroad, the report said.

“Worldwide fiscal strains have the potential to cause tensions in interbank funding markets, to derail the global economic recovery, or to trigger a disorderly resolution of global imbalances,” the Ottawa-based central bank said in a report by the Governing Council, which also sets interest rates.

Canada will host a meeting of Group of 20 leaders in Toronto this weekend aimed at promoting financial regulations to prevent another global credit crisis and reviving economic growth while paring back government deficits. Bank of Canada Governor Mark Carney has said the global recovery is at risk unless policy makers set new rules to make the financial system more resilient to the failure of individual institutions and to swings in the economic cycle.

The report pointed to “the risk that key elements of the reform agenda will be diluted, either because of complacency as economic and financial conditions improve or because of fears that reforms could harm a still-fragile recovery.”

Canadian financial institutions are at greater risk of finding it harder to access short-term capital, the report said. Difficulties could come from strains related to global economic “imbalances” and currency volatility, as well as concerns the global economic recovery could stall, leading to a lower willingness of other banks to take risks, today’s report said.

The risk of Canadian institutions having too little capital has decreased since December, and the risk from high levels of consumer debt was little changed, the report said. The growth of household debt is still an “important source of risk,” the bank said.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

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