High levels of household debt are risky to the stability of Canada’s financial system and the current situation poses a “key vulnerability”. That was one of the main messages of a speech given by Bank of Canada Deputy Governor Lawrence Schembri, speaking at the Guelph Chamber of Commerce Wednesday.

He highlighted that Canada had escaped the worst of the financial crisis due to strong regulatory and supervisory frameworks but said that current high levels of household debt could trigger issues for the nation’s economic stability. Mr Schembri warned that those with large debt burdens could end up in default on mortgages or other loans, but are also more likely to cut back on spending which further weakens the economy.

Although the bank assesses the risk of widespread defaults to be low, the situation will continue to be monitored. Mr Schembri warned that if large numbers of highly-indebted people were forced to sell their homes it would cause a sharp drop in house prices “particularly in Toronto and Vancouver.”

While a house price correction would have “large direct effects on Canadian mortgage lenders” the deputy governor said that he believes most lenders are in a strong position.

Despite the risk from high debt levels, Mr Schembri ruled out increases in interest rates.

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