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It is clear that the ability of the household sector as a whole to absorb major shocks is less now than it was a decade ago

“Moreover, with interest rates near record low levels, there is not much scope for interest rates in Canada or the United States to fall further – something that helped people weather storms in the past,” he said.

Mr. Zelmer said having well-capitalized lenders might not be enough in times of stress, noting that creditors and investors often lose confidence in financial institutions before they run out of capital.

“Recall that some financial institutions lost access to funding markets in the midst of the global financial crisis even though they were reporting healthy regulatory capital ratios at the time,” he said. “Sitting back and relying on capital is not enough for either financial institutions or prudential supervisors.”

Mr. Zelmer said stress tests, which so far indicate Canadian banks are prepared for a downturn, should not be viewed as overarching “safe harbours” because they are based on models and arbitrary assumptions.

“The results are … comforting. But given the considerable uncertainty associated with stress test results, they are but one input into our decision-making,” Mr. Zelmer said.

“Boards and senior management of financial institutions need to apply judgment in a forward-looking manner and not become too complacent in their capital planning exercises.”

While Canada’s recent housing activity has been far less troubled in recent years than in other markets such as the United States, Mr. Zelmer reminded his audience of the downturn experienced a couple of decades ago.