The Bank of Canada says the financial system is becoming increasingly exposed to economic shocks as household debt levels continue to climb and major housing markets remain red hot.
But even as it warns the country’s most significant weak spots continue to widen, the central bank says the overall financial system remains resilient.
The bank’s assessment is part of its bi-annual review of the key vulnerabilities and risks surrounding the stability of the financial system.
WATCH: Bank of Canada warns of financial vulnerability in housing sector
The analysis says the growth in mortgage lending in Toronto and Vancouver has largely fuelled an increase in Canada’s overall household indebtedness since the bank’s last review six months ago.
The bank says while recent federal measures have improved the credit quality of insured mortgages, the share of uninsured mortgages is increasing and their characteristics are showing more signs of risk.
The report says another financial stability concern could emerge if more and more borrowers accumulate debt elsewhere to enable them to put down bigger down payments because of recent changes to mortgage rules.