The Bank of Canada has released its Financial Stability Report, highlighting the current risks and vulnerabilities facing Canada’s financial system. Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers discussed the findings, noting that while some risks have diminished, others have increased due to global trade tensions.
“The country’s financial system has faced unprecedented shocks in recent years, and it has proven resilient,” they stated. However, the shift in US trade policy towards protectionism poses a new threat to both the Canadian economy and financial stability. The imposition of tariffs and uncertainty surrounding trade agreements have negatively impacted prospects for global economic growth.
In the near term, unpredictable US trade policies could lead to market volatility and liquidity issues. Over time, a prolonged trade war could result in reduced economic growth and higher unemployment rates, which may affect households’ ability to manage debt payments. “A long-lasting trade war poses the greatest threat to the Canadian economy,” Macklem warned.
Households remain vulnerable despite lower interest rates. Debt relative to disposable income is still high compared to historical standards. Signs of financial stress are evident among households without mortgages, with an increase in missed credit card or auto loan payments.
For businesses, especially those in trade-related sectors with high debt levels or low profitability, managing debt could become challenging if a prolonged trade war disrupts supply chains and reduces demand for exports.
Canadian banks are well-positioned with increased capital buffers and provisions for credit losses. However, large-scale credit losses could lead banks to reduce lending activities, exacerbating economic downturns.
The report also highlights concerns within the non-bank financial sector due to hedge funds’ growing presence in government bond markets. Their increased leverage raises potential volatility risks during periods of market stress.
Despite these challenges, Macklem emphasized that “the Canadian financial system is resilient.” He urged vigilance as vulnerabilities persist amid ongoing economic uncertainties. By identifying these vulnerabilities now, efforts can be made to strengthen the system’s resilience against future shocks.
The Bank remains engaged with financial participants and authorities both domestically and internationally to monitor developments closely.
With this assessment concluded, Macklem invited questions from attendees regarding the report’s findings.
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