A high debt economy like Canada's is vulnerable to shocks: IMF Canada mission chief
A day before earnings season kicks off for Canada’s big banks, the International Monetary Fund is praising the institutions’ “resilience” against a possible economic downturn.
“The banking system in Canada is quite sound and I think the policies that have been introduced to reduce debt will enhance financial stability and financial resilience,” IMF mission chief for Canada Cheng Hoon Lim told BNN Bloomberg in a Tuesday interview.
Lim said the Canadian banks recently passed IMF stress tests amid “extreme” hypothetical scenarios.
“In [a] stress test, we assumed an extremely, extremely adverse scenario where housing prices correct by 40 per cent, where the unemployment rate shoots up quite high, there’s a recession in the economy and so on,” she said.
“Under even that extreme scenario the banking system was resilient and that’s because they have sufficient capital and sufficient liquidity buffers.”
The banks have come under fire over the past quarter, notably being the subject of a short call by famed portfolio manager Steve Eisman, who told BNN Bloomberg Canada’s bank CEOs are ‘extremely ill-prepared’ for a potential downturn in the credit cycle.
However, many Bay Street investors saw reason for optimism following disappointing first-quarter earnings.
“I think we’ve seen the bottom,” Greg Newman, senior wealth advisor at Scotia Wealth Management, told BNN Bloomberg in March. “We knew this was going to come. We saw it with the U.S. banks that reported a month earlier. Credit froze up, and it really hit them in capital markets. This year, so far, has been the antithesis of that.”
Canadian Imperial Bank of Commerce is the first of the big banks scheduled to report second-quarter results, handing in its report on Wednesday. Royal Bank of Canada and Toronto-Dominion Bank will follow on Thursday, with Bank of Nova Scotia and Bank of Montreal slated for next week.
- with files from BNN Bloomberg's Paul Bagnell