Senior Deputy Governor Carolyn Rogers and the Governor of the Bank of Canada recently discussed the findings of the Financial Stability Report (FSR). This annual report evaluates the stability of Canada’s financial system and identifies potential risks. According to them, while some risks have decreased, others have increased due to current trade conditions.
“The country’s financial system has faced unprecedented shocks in recent years, and it has proven resilient,” they noted. The pandemic’s challenges were met with resilience by households, businesses, banks, and other financial institutions. However, new threats are emerging as US trade policy becomes more protectionist, affecting global economic growth prospects.
“A long-lasting trade war poses the greatest threat to the Canadian economy,” they stated. Such a scenario could lead to market volatility and liquidity strains in the short term. In a worst-case scenario, this volatility might escalate into market dysfunction.
In terms of medium-term effects, a prolonged global trade war could significantly impact economic growth and employment rates. This situation may challenge households and businesses with high debt levels who might struggle with payments if loan losses occur on a large scale.
The FSR examines these vulnerabilities across four key sectors: households, businesses, banks, and non-bank financial intermediaries such as finance companies and pension funds. “Total debt relative to disposable income is lower than it was a year ago,” but signs of financial stress among certain household groups persist.
Regarding businesses, those in trade-related sectors might face difficulties due to their existing high debt levels or low profitability. Canadian banks are prepared for higher credit losses thanks to increased capital buffers; however, widespread credit losses could lead them to reduce lending.
The non-bank financial sector also faces challenges due to hedge funds’ growing presence in government bond markets. While their activity helps absorb government debt issuance and maintain liquidity, their leverage increases risk during periods of stress.
Despite these concerns, “the Canadian financial system is resilient.” The system successfully navigated rapid interest rate rises post-pandemic but must remain vigilant against emerging vulnerabilities.
The Bank remains committed to monitoring developments closely alongside other authorities both domestically and internationally: “A stable and resilient financial system absorbs shocks rather than amplifying them.”
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