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Bank of Canada says it sees no signs of broad stress across financial system

A sign is pictured outside the Bank of Canada building in Ottawa

By Julie Gordon and David Ljunggren

OTTAWA (Reuters) - A resilient financial system and a targeted response by authorities have tempered the impact of the COVID-19 pandemic on Canada's financial system, but risks remain and the Bank of Canada must remain vigilant, a top official at the bank said on Monday.

Deputy Governor Toni Gravelle said the economy had performed better than the scenario it outlined in April when it carried out a stress test of Canada's six main banks, further reducing concerns about financial stability.

But many households and businesses are facing tough times, which could lead to credit losses that ripple throughout the financial system, Gravelle told a Quebec audience.

"If losses make it harder for banks to make loans, the recovery in economic activity and employment will be hampered, amplifying an already challenging situation. So we need to remain vigilant," he said.

Gravelle noted that before the pandemic, Canada already faced significant vulnerabilities, most notably high levels of household debt and overheating housing markets.

"Given these, we have long warned that a recession could create broad stress across the financial system. Yet, despite the devastating economic impact of the pandemic, this risk has not - as of yet - materialized," he said.

While the household debt picture has improved, due both to government transfers that bolstered incomes and less spending on non-essentials, mortgage debt has continued to grow at a steady pace, said Gravelle.

Still, the central bank is not yet seeing signs of housing speculation, he added. While business insolvency filings remain below pre-pandemic levels, many enterprises where social distancing is difficult, such as bars, restaurants and gyms, are struggling.

Gravelle also said the central bank expected to keep interest rates low "for quite some time," echoing a pledge that it would keep rates at record lows into 2023.

(Reporting by Julie Gordon and David Ljunggren in Ottawa; Editing by Peter Cooney)