The Bank of Canada is warning that high levels of household debt and overheated housing markets in Canada's largest cities remain the biggest risks to the Canadian economy, but they are being mitigated by strong economic growth and an improving job market.

"Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation, but we need to continue to watch financial vulnerabilities closely," said Bank of Canada governor Stephen Poloz. 

In its latest financial system review, released Tuesday, the central bank warns that risks to the Canadian financial system remain elevated largely because of historic levels of household debt that are continuing to rise. 

More than 80 per cent of that debt is tied up in mortgages and home equity credit lines, which allow home owners to borrow against the value of their homes. This leaves Canadian homeowners particularly vulnerable to a sharp drop in housing prices or a sudden spike in interest rates. 

The bank says it still sees risk in the Toronto and Vancouver areas, where job and population growth have pushed demand beyond what the limited supply of homes can meet.

"These vulnerabilities continue to be elevated and it will take a long time for them to return to more sustainable levels," said Poloz.

Toronto stabilizing, Vancouver high

Speculators trying to cash in on the recent housing surges in those markets have driven prices even higher, which the banks warns could lead to a price correction.

The rate of housing price growth in the Toronto area has stabilized recently. But it remains high in Vancouver — especially when it comes to condominiums and single family homes. 

Still, the bank says recent changes to housing policy at the federal and provincial levels, as well as recent mortgage rate hikes, should help ease those risks over time. 

Ontario and British Columbia have introduced new housing rules and taxes on foreign buyers to slow localized price surges. Changes in federal mortgage rules — including the introduction of a so-called stress test for buyers — has led to people getting smaller mortgages or buying less-expensive homes. 

"That is just good practice for anybody who is taking on new debt," said Poloz.

The bank says all of those factors should slow down housing activity over time and limit the creation of new highly indebted households. But officials warn it will take a significant amount of time for the levels of household debt to fall to a comfortable level.

Cyberattacks worrying

The bank also sounded the alarm on the impact a successful cyberattack could have on the Canadian financial system. 

Due to the interconnectedness of Canadian financial institutions, the central bank warned that a successful attack against a single institution could spread across the entire financial system.

"There has been a worldwide increase in the frequency, severity and sophistication of cyber attacks. Because our financial system is so interconnected, a successful attack on one institution can potentially lead to widespread disruptions," said Poloz.

"We are working with our partners in the banking industry and public sector to ensure the system is robust and that institutions can recover quickly should any disruptions occur."

The bank believes it is only a matter of time before that happens, so it has been running a series of stress tests to identify vulnerabilities in their system and to develop plans for a quick recovery from a cyberattack.

This could include private sector banks covering for each other if a cyberattack disables one of the major players to allow business to continue during a period of operational crisis.