CA BOC Financial System Review

Good morning. Deputy Governor Toni Gravelle and I are pleased to be here to discuss the Bank of Canada’s Financial Stability Report, or FSR. A stable and efficient financial system is essential to our economy. It supports growth and helps households and businesses to save, invest and manage risks. We monitor the financial system closely—and each year, we publish this report to share our assessment with Canadians. The FSR is very different from our Monetary Policy Report. It is not a forecast, and it does not guide interest rate ...

Canada’s financial system has continued to function well despite US tariffs and trade uncertainty. But a more turbulent global environment poses risks to financial stability, particularly if several vulnerabilities crystalize at the same time. The Canadian financial system continues to be resilient. Households and businesses remain in stable financial condition, and banks have strengthened their capacity to absorb shocks. However, vulnerabilities have increased in some parts of the system. Valuations of many financial assets have continued to rise, increasing the risk of a sudden correction. At the same time, global sovereign debt issuance is growing, and hedge funds have increasingly absorbed this debt in recent years. Individually, these vulnerabilities are manageable. But with increased economic and geopolitical risks, it is more likely a new shock or a combination of shocks could cause multiple vulnerabilities to crystalize at once. If this were to happen, these vulnerabilities could interact and reinforce each other. In the extreme, a cascading series of events could cause a sharp loss of investor confidence. This could lead to liquidity hoarding or rapid asset sales, putting pressure on core funding markets. Stress could then spread across the financial system and the broader economy. Just in | BoC Financial Stability Report Highlights Elevated Risks Yet Affirms Resilience of Canadian Financial System. BOC SAYS NEW SHOCKS MAY EXPOSE SEVERAL VULNERABILITIES AT ONCE. A SERIES OF EVENTS COULD LEAD TO A SIGNIFICANT DROP IN INVESTOR CONFIDENCE AND AFFECT MAIN FUNDING MARKETS, ACCORDING TO BOC.

Good morning. Senior Deputy Governor Carolyn Rogers and I are pleased to be here to discuss the Bank of Canada’s Financial Stability Report (FSR). Each year, the Bank assesses the stability of Canada’s financial system and highlights risks that could threaten that stability. While some risks have diminished, the current trade environment has pushed risks higher overall. But let us look back for a minute before we look ahead. The country’s financial system has faced unprecedented shocks in recent years, and it has proven resilient. Households, businesses, banks and other financial institutions weathered the upheaval of the pandemic and the sharp rise in inflation and interest rates that followed. It was a difficult period for many Canadians, and pockets of stress remain. But proactive steps taken by households and businesses, together with substantially lower interest rates, put the system on a more resilient footing heading into 2025. Now, the Canadian economy and financial system face a new threat. US trade policy has taken a dramatic protectionist shift. Tariffs and uncertainty have sharply reduced prospects for global economic growth. And financial markets have been rocked by chaotic policy announcements and reversals. A long-lasting trade war poses the greatest threat to the Canadian economy. It also increases risks to financial stability. There are two key concerns. In the near term, the unpredictability of US trade policy could cause further market volatility and strains on liquidity. In an extreme case, market volatility could turn into market dysfunction. In the medium term BoC's Gov. Macklem: The current trade environment has pushed risks higher overall. BoC's Gov. Macklem: Uncertainties make it particularly difficult to anticipate risks to the financial system. BoC's Gov. Macklem: Long-lasting trade war poses the greatest threat to the Canadian economy and also increases risks to financial stability.

From the time of the 2024 Report until the beginning of 2025, major central banks eased monetary policy as inflation fell worldwide. Lower policy interest rates helped reduce vulnerabilities in the financial system related to debt serviceability. Despite brief periods of volatility in global markets, Canadian fixed-income and other core funding markets functioned well, and debt issuance conditions remained solid. Banks maintained elevated levels of capital and liquid assets. Non-financial businesses also kept healthy balance sheets. As interest rates declined, the pressure on businesses and households with variable-rate debt and those facing mortgage renewals also eased. At the same time, some risks increased. Financial asset prices rose, and valuations in some markets appeared elevated. Global debt levels also increased. Leverage of some non-bank financial intermediaries (NBFIs) continued to grow alongside a rise in their participation in core funding markets. BANK OF CANADA SAYS TRADE WAR WITH U.S. THREATENS THE CANADIAN ECONOMY AND POSES RISKS TO FINANCIAL STABILITY BOC FINANCIAL STABILITY REPORT SAYS IN EXTREME CIRCUMSTANCES, MARKET VOLATILITY COULD TURN INTO MARKET DYSFUNCTION BoC: Severe and long-lasting global trade war could push the rate of mortgage arrears beyond levels seen in 2008-09. BoC Financial Stability Report: We will closely watch indicators of financial stress and evidence of precautionary behavior by financial system participants.

A stable and efficient financial system is essential for sustaining economic growth and raising standards of living. In the Financial Stability Report, the Bank of Canada assesses the resilience of the Canadian financial system and identifies key risks that could undermine its stability. This year, the Bank renamed its annual assessment of the stability of the Canadian financial system to the Financial Stability Report from the Financial System Review. This reflects a continuing evolution in how the Bank assesses risks to Canadian financial stability. In particular, the Report: takes more of a cross-sectoral perspective when assessing overall financial stability in Canada by accounting for interconnections among sectors in the financial system considers how financial system participants are building resilience against the risks to their sector and to the broader financial system Analysis about the structure and efficiency of the financial s BOC REPORT: CANADA'S FINANCIAL SYSTEM APPEARS RESILIENT; OVER THE LAST YEAR FINANCIAL SYSTEM PARTICIPANTS HAVE CONTINUED TO PROACTIVELY ADJUST TO HIGHER RATES. BOC REPORT: SIGNS OF FINANCIAL STRESS HAVE RISEN PRIMARILY AMONG HOUSEHOLDS WITHOUT A MORTGAGE.