Rising credit to GDP gap signals banking system 'vulnerability,' warns report

A new international banking report groups Canada with China and the special administrative region of Hong Kong as jurisdictions whose domestic banking systems are at risk from rising debt levels.

The Bank For International Settlements, which is owned by the world’s central banks, says there are early warning indicators in credit-to-gross-domestic-product ratios which signal “vulnerabilities” in the three systems.

For Canada and Hong Kong, the stresses to the system are linked to property price gaps above critical thresholds, a measure often linked to overheated housing markets.

The bank’s second quarter report says Canada’s credit-to-GDP gap stands at 11 per cent above its long-term trend while Hong Kong is 35 per cent higher and China is up 22 per cent. The gap in the United States fell by 7.6 per cent.

The bank cautions that the numbers are “broadly indicative” of the exposure of debt service to higher yields under stress scenarios and should not be treated as a formal stress test.

Last week, Statistics Canada reported the amount Canadians owe compared with their disposable income hit a record high of 167.8 per cent in the second quarter, up from 166.6 per cent in the first quarter. It means for every dollar of household disposable income there was $1.68 in credit market debt.