* Overall risks to financial system remain high
* Household debt the biggest domestic risk
* Bank flags concern over strong multiple-unit starts
* Euro debt crisis, fiscal cliff big external threats
By Louise Egan and David Ljunggren
OTTAWA, Dec 6 High household debt and a heated
housing market remain the biggest domestic threats to Canada's
financial system, the Bank of Canada said on Thursday, despite
tighter mortgage rules introduced by the government in July.
"The most important domestic risk to financial stability in
Canada continues to stem from the elevated level of household
indebtedness and stretched valuations in some segments of the
housing market," the central bank said in its semi-annual
Financial System Review.
Canada's financial system remains robust but the overall
risks to the stability of the banking sector remained high,
unchanged from June, it said.
The bank ranked the European debt crisis as "very high," the
highest of its four levels of risk, and it described ongoing
U.S. fiscal negotiations as a major near-term threat.
The danger from the one trouble spot the bank can
potentially address through policy action - household borrowing
- was also unchanged from June at "high."
Housing prices and construction in Canada roared higher in
2011 amid low interest rates, sparking fears of a U.S.-style
bubble. The market started to slow after the government
tightened rules on mortgage lending in July, the fourth time it
had acted to curb borrowing since 2008.
The Bank of Canada's two-year freeze on interest rates is
also seen as a reason for the credit binge and the bank has said
it could, as a last resort, use monetary policy to address the
The bank said on Thursday it was too early to say if the
cooling seen in recent weeks would endure.
Canada's debt-to-disposable income continues to rise even
though credit growth has moderated. Housing resales and housing
prices have cooled, although prices are 16 percent higher than
the previous peak in August 2008.
Housing starts, particularly in the multiple-unit or condo
market, have stayed strong and point to potential oversupply in
that market, the bank warned.
"These fragilities could themselves trigger financial stress
or significantly amplify the adverse effects of other shocks on
the financial system," the bank said.
If the unemployment rate were to rise by 3 percentage points
by early 2014, the proportion of household loans in arrears
would rise to 1.2 percent in early 2015 from about 0.4 percent
in the second quarter of this year, the bank projected.