Video: Financial vulnerability


Brenda Spotton: Thank you so much, Kelley. Thank you, everybody, for this great opportunity to get together and brainstorm issues of financial literacy research. This panel has been put together, as the agenda suggests, for exploring financial vulnerabilities. So far we've been hearing about financial well-being and financial behaviour. We want to take you over to financial stress and financial vulnerabilities. To support our collective effort for empowering Canadians and improving their financial wellbeing, we need to understand the situations of those Canadians who report self-assessed financial stress, objective financial stress, and who are otherwise vulnerable in some fashion.

We know that financial stress, however we measure it, whether it's a subjective or an objective, high financial subjective stress swamps other determinants of the satisfaction of Canadians for their general wellbeing. These are the results that Matt Brzozowski, a colleague of mine at York University, and I have discerned from the general social survey for 2005 and 2010. While 60 percent of the Canadians demonstrate or report some measure of extreme stress, financial stress was the primary source of stress for 13 percent of those. More recent reports, more recent studies, suggest that that financial stress is even higher among Canadians, and in fact a recent study that perhaps Eloise will talk about in more detail suggests that even Canadians with incomes over $100,000 experience significant financial stress.

Reporting on other research, the 2015 Money Management Report from the Financial Consumer Agency of Canada refers to the fact, what we know, that if someone is experiencing subjective financial stress, that that can inhibit their individual ability to take action when needed, and so affect their objective financial stress. We know financially vulnerable households do feel stressed. They're worried about their finances. They do struggle financially. They are at risk of bankruptcy and debt default, and they are at risk of having their financial situation disrupted by an unexpected expenditure or a sudden loss of income.

Our question, though, is just what do we mean by financial vulnerability. It could be that it's a situation in which the household finances are fragile, precarious, or tenuous, but then what does that mean? It means different things to different people, different researchers, and it's often easier to recognize than to define operationally. But as two researchers out of the International Monetary Fund reported in a 2017 study, the concept remains quite vague, and there is a lack of consensus on operative definitions.

So what I want to take you through in the last few minutes of this introduction is to provide a bit of a taxonomy or a couple of lenses through which we might view financial vulnerability. In the first instance, it could be constructed as a solvency concept, so that we say that there are financial vulnerabilities associated with household assets relative to liabilities, or, as I'll show you shortly, the household debt problem. It may be constructed as a liquidity concept, where the focus is on the ability to make payments, either now or in the future. And for those of you familiar with the Canadian Financial Capabilities Survey, will know that many of those questions are focused on the liquidity concept of financial stress and vulnerability.

Financial vulnerability is a risk of insolvency, just to start from basic foundations, insolvency is a balance sheet concept. So we're thinking of net wealth as assets minus liabilities. If that's negative, we have an insolvent household. The larger a household's debt load, the more the debt service payments, for example, if they increase, could threaten the household's solvency.

Just to give you a couple of contexts for the Canadian situation, household leverage in Canada has been rising steadily since 2000 and right now sits at 169 percent of after-tax income. That is, for a $1.69—Canadian households have $1.69 in debt, on average. Sorry, folks. I'm going to switch the – in the interests of time. Those of you snapping pictures. They have $1.69 for every dollar of after-tax income. The total household debt across Canada is 2.1 trillion, but of course that is – just sounds like a large number with a lot of zeroes, and really what matters is what's the breakdown and what's the average, as well as the variation of the dispersion of that debt. So, to give you a perspective on how debt is distributed amongst Canadian households, we have a couple of figures here.

First of all, total household debt, at 2.1 trillion, is largely comprised of mortgages and home equity lines of credit, at 1.5 trillion, or about 75 percent of the total household debt. Fifteen percent of that, for example, of households have loans to income ratio at greater than 450 percent. That is extremely high. These tend to be younger or low-income households, often living in the Toronto or Vancouver markets, which we know house prices are exorbitant. A fraction of the total debt that households have currently is in the consumer debt market, comprising about 49 cents out of every $1.69 of debt for the average household.

Rather then stemming from the debt loads per se, it could be a risk of illiquidity. Illiquidity is instead a cash flow problem, where the current income is inadequate to cover current expenditures. And as one of the questioners raised in the earlier session, the question is what is the timing of those expenditures relative to the timing of the income. So risk of illiquidity —as an indicator of financial vulnerability could be a separate – not unrelated, but separate – indicator of financial vulnerability.

However, when we look at the debt service ratio to disposable income, we find that it's been bopping along at under 15 percent for quite a few years. The fact that we've got increasing debt loads but debt service ratios that are still fairly constant is due to the fairly low interest rates that have been prevalent in the Canadian economy for the last ten and 15 years.

So financial vulnerability, as today's illiquidity problem, appears in the studies that probe Canadians' feelings of struggling with finances, their ability to meet current expenditures, their use of payday loans. And these indicators, of 31 percent of Canadians reporting struggling or not keeping up with current bills and expenditures, 45 percent of payday loan borrowers are using high-cost loans to pay for the unexpected and necessary expenses, 36 percent of Canadians experience income variability in an intra-month basis, month to month, from precarious employment or whatever. Canadians are experiencing financial vulnerability as today's illiquidity problem.

There's also evidence that financial illiquidity is a risk of tomorrow's – financial vulnerability is a risk of tomorrow's illiquidity. So we know from some of the other Canadian financial capability surveys results that 56 percent of Canadians could not cover at least six months of living expenses were they to lose their job. Thirty-eight percent of Canadians have only enough savings to buffer the —or to last one to two months or less, according to a smaller, more recent study done by Seymour Consulting that Eloise will speak to. Forty-three percent of Canadians would not draw on savings or emergency funds to cover the unexpected $500 expense. And the issue is we don't know why they wouldn't use it.

So some of our questions to try and probe financial stress, financial vulnerability, is who exactly is financially vulnerable. We don't – we know that it's not people, necessarily, in low-income positions. People who are financially stressed, according to the general social survey, are in a much higher income bracket as well as low income. How does financial vulnerability present itself? Where are the financial pressure points? How volatile are income and expenditure flows? How do consumers cope? What behaviours would lessen vulnerability? These and other questions our panel here are going to help us explain. I'd like to now turn the podium over to Professor Dr. David Rothwell from Oregon State, all the way from the west coast, arriving last night. Thank you, David.

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