HIGHLIGHTS-Bank of Canada’s Poloz and Wilkins speak in Ottawa | Reuters

TORONTO, June 8 Below are some key quotes from
an appearance on Thursday by Bank of Canada Governor Stephen
Poloz and Senior Deputy Governor Carolyn Wilkins in Ottawa,
after the release of the semi-annual Financial System Review.

POLOZ ON RISK OF HOUSING CORRECTION

“We’re only looking at what I call extreme events. So we’re
looking at something that is a little bit more probable than
something else, both of them are still what economists call tail
risks. Things that we need to be mindful of but no one is
predicting that they’re about to occur.”

“Moderate means more than low, and through time, I’m more
comfortable observing that that risk that we talk about, the
risk of a price correction in specific housing markets appears
to be growing through time. It’s not just a static thing, it’s
becoming more of a vulnerability, not less. That doesn’t mean
it’s become highly probable.”

POLOZ ON SIGNS OF ECONOMIC STRENGTH

“It’s important piece of the setting when we talk about
these risks, that the economy has shown more signs of strength
in recent months, and that we still have questions around
sustainability and what risks we face on the macro front.”

POLOZ ON BANK ACTIONS AND OIL SHOCK

“It does appear that the actions that we took in 2015 have
done a good job to facilitate the economy’s adjustment to that
shock. That’s encouraging.”

WILKINS ON CAUSES OF U.S. CREDIT CRISIS, CONTRAST TO CANADA

“It is important to look at the U.S. experience and see to
what extent there are similarities and differences and I think
when you see house prices where they are and you see
indebtedness it is quite tempting to draw parallels and at the
same time when you understand what really led to the severity of
the financial stress in the U.S., which was actually quite
global in 2008 and 2009, it was related to a number of factors
that are not present in Canada.

“And one of them is just the underwriting standards in
Canada are high and they are effectively enforced. We are not
seeing the kind of ninja loans, if you remember those, just as
an example, you look at delinquency rates, they are historically
low, they still are.

“I think really importantly is just the difference in laws,
lenders in Canada have recourse to other household assets. It is
not always the case in the U.S., and that changes the recovery
rates for institutions if there is a problem but it also means
that households have greater incentives to hang on and not walk
away.”

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WILKINS ON SECURITIZATION IN CANADA

“And then I think finally and probably the most important
thing is just how the mortgages were financed in the U.S. which
related to very complex securitization products that packaged up
risk and spread it around in a way that was completely mispriced
and so when it unwound it just amplified the situation.

“So what might have been a macro cycle ended up being a
financial crisis. And so when you look at Canada we have much
less securitization it’s public, it’s plain Jane.”

POLOZ ON ALTERNATIVE LENDING SECTOR

“There are lots of folks out there who are self-employed or
have recently moved to Canada, other cases where they just don’t
have the paperwork it takes to walk in and be approved at a bank
for a mortgage in 60 seconds because they don’t fit the
template.”

“So this alt-lending sector does an important service, it
fills that space. It takes longer to kick the tires and do its
credit approvals, but people do get a mortgage and as you can
tell from the stats that have been published, they have very,
very low default rates, so it’s a business that works.”

POLOZ ON RATINGS FOR CANADIAN BANKS

“I see that (Home Capital situation) as unconnected to
whether or not somebody is analysing the banking system as a
whole and upgrading or downgrading ratings on the banks. That
has traditionally been a focus on exposure to the housing
sector, banks are always higly exposed, that’s their bread and
butter business. There are banks in the world that offload that
stuff, they keep most of it on their balance sheet. That’s a
business model that’s proven itself to be higly successful for a
very long time. Whether they’ve been downgraded or not they are
still extremely highly rated.”

POLOZ ON CONSUMER DEBT:

“I’m reminded particularly by the correspondence flow that I
get that there’s an awful people out there who don’t have
mortgages, in fact have assets and are quite critical of how low
interest rates are. So what happens when interest rates go up to
those people is they have more income, they have more spending
power. So it’s important to understand that the average consumer
out there is not the highly-indebted, 450 percent, consumer that
we’re concerned about in the tail distribution.

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“The average consumer has actually assets and no debt. So
there’s a lot of assets out there, which means then, the
macroeconomic response to movements in interest rates has been
more complicated by all this. It’s not just people with
mortgages affecting how that outcome play out.”

POLOZ ON POSSIBLE CATALYSTS FOR HOUSE PRICE CORRECTION

“As time goes on you see more and more evidence that price
increases in Vancouver and in Toronto have an element of
speculation to them. So that’s a separate, all-by-itself growing
vulnerability. As I said before, the longer that goes, the
bigger it gets, and the more you start to be concerned that not
necessarily a global recession but just about anything could be
responsible for causing a correction in housing.

“A trigger or a catalyst that could be literally anything,
it could be a change in policy or it could be what we saw in
Vancouver a year ago was prices just got high enough that
through their own weight, because you actually have to buy the
house in the end and when the price gets really high it can be
hard to finish that transaction, so people started to back
away.”

POLOZ ON ECONOMIC RESILIENCE:

“At this stage, I’m just comforted by the fact that the
economy is showing better dynamics and that does go into this
equation of financial risk as a positive. It means that the
resilience is rising in the background, even if the
vulnerabilities are also rising in the foreground.

POLOZ ON HOUSING MARKET SPECULATION IN TORONTO, VANCOUVER:

“The fundamental demand for housing in both of those
markets. This is not by any stretch an entirely speculative
situation. There are fundamental drivers that are pushing the
demand for housing.

“What we often forget is there’s a supply side to this. The
most important we’ve seen in Toronto is a very big rise in
supply of houses that people are willing to sell … There’s an
implied supply there, and that higher prices bring out those
decisions.”

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POLOZ ON RISING DEBT AND INTEREST RATE SENSITIVITY

“For every person that thinks that the vulnerability we’re
looking at will be a reason to hesitate to move interest rates
higher, there’s someone else who thinks it’s a perfectly good
reason to move rates higher.”

“Certainly what we’re cognizant of is that there’s been an
increase in debt in the economy, so interest rate senstivity
could be higher going forward than it has been historically.”

POLOZ ON DEBT AND HOUSING

“Debt is rising because people want to own a home. It’s not
really that complicated. And we’ve got solid fundamentals that
are pushing the prices of those homes.”

“There are lots of other housing markets in Canada that are
behaving completely normally. Fundamentals are solid, prices are
rising gently, a little bit more than inflation maybe, but
nothing untoward.”

“People borrow to buy a house but when we see the
debt-to-income ratio rise, it is usually not because everybody
who has got debt borrows some more, it is that some new family
who has no debt has entered the housing market for the first
time.”

“With the new rules in place we know that those folks have
been stress-tested quite well. They are able to withstand as
much as a 200 basis point renewal rate increase, because they
got the income today to handle that even though that renewal
might be five years from now, or it depends on what they have
chosen. The point is that they have got time perhaps to have a
higher income by then too. So in other words, the sustainability
ingredients are all on the rise.”

(Reporting by Alastair Sharp, Solarina Ho and Fergal Smith in
Toronto; Assembled by Amran Abocar)

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