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Canada\u2019s financial system remained resilient despite United States tariffs and trade uncertainty , but a highly volatile global situation could cause a sharp drop in investor confidence, says the Bank of Canada . <\/p>\n
The trade war\u2019s impacts on Canadian businesses have been less widespread than was initially feared since most Canadian trade with the U.S. remains tariff-free and changes to U.S. trade policy have not led to lasting deterioration in financial situations, according to the central bank\u2019s Financial Stability Report released Thursday. <\/p>\n
But that might change if the U.S. imposes tariffs on a broader set of goods or increases current tariff rates, which could negatively impact cross-border trade and the economy. The war in Iran has only added to the uncertainty by driving up energy and commodity prices. <\/p>\n
The Bank of Canada also said risks related to artificial intelligence are growing. Cybersecurity weaknesses within the financial system may be more easily exploited and the recent drop in the share prices of some software companies has led to stress in private credit markets. <\/p>\n
\u201cWe\u2019ve seen the risks sort of stabilize, particularly in households and businesses,\u201d senior deputy governor Carolyn Rogers said during a news conference Thursday. <\/p>\n
\u201cIf there\u2019s one area where we see a little bit more risk, it\u2019s in the hedge fund participation in the sovereign bond market. There continues to be high levels of leverage, and with a more volatile geopolitical environment, that makes it more likely that trigger events could disrupt the market.\u201d <\/p>\n
Deputy governor Toni Gravelle said the central bank will continue to monitor Canada\u2019s financial system closely. <\/p>\n
\u201cWe must stay vigilant,\u201d he said. \u201cA stable and resilient financial system absorbs shocks rather than amplifying them, and that benefits every Canadian.\u201d <\/p>\n
The Bank of Canada said the financial health of Canadian households hasn\u2019t changed much since the previous report, which was published last May. <\/p>\n
Household debt levels remain elevated, but wealth is rising and the share of borrowers behind on debt payments has stabilized. The ratio of household debt to disposable income has slightly increased over the past year, according to Statistics Canada fourth-quarter data, but remains below the peak in 2022. <\/p>\n
Rising housing prices have also driven up household net worth over time, mainly from higher values for financial assets and strong stock market gains. <\/p>\n
But the Bank of Canada said wealth gains are not evenly distributed among Canadians and many households are also highly susceptible to changes in the labour market. If the economy continues to weaken and job losses rise, households without sufficient savings could fall behind on mortgage and consumer credit payments. <\/p>\n
\u201cThere are, no doubt, still some households where those gains have either not occurred or not occurred to a level that is helping them deal with the higher cost of living. There\u2019s still going to be some stress there,\u201d Rogers said. <\/p>\n
\u201cIt can be true that even though the data looks better, people still feel stressed. Canadians have gone through a lot of economic and financial stress over the last years. The headlines feel precarious; things feel uneasy.\u201d <\/p>\n
Some homeowners may also be facing higher mortgage renewal rates this year, as higher bond yields mean banks may soon raise their five-year, fixed-payment mortgages. The central bank said households with strong income growth over the past five years should be able to manage the payment increases, but others may have less flexibility. <\/p>\n
Falling home prices can also limit people\u2019s financial flexibility, central bank officials said. <\/p>\n
The price of a typical home in Canada has fallen by about five per cent in the past 12 months and by 20 per cent since prices peaked in 2022, according to the report. It said lower home prices are not necessarily a problem for those who can keep up with mortgage payments, but those who need to refinance to manage their payments may not be able to qualify if they have too little equity to meet lenders\u2019 requirements. <\/p>\n
\u201cHouseholds have been prudent. They have been saving. We saw this (mortgage renewal) wave coming, and they saw it, too. Some households have seen wage increases that helped absorb the payment shock,\u201d Rogers said. <\/p>\n
\u201cWe do have regulatory measures in place that help buffer households \u2014 the minimum qualifying rate, the stress test on mortgages \u2014 and that has proven a really valuable measure over the last few years. But this is something we\u2019ll have to continue to watch.\u201d <\/p>\n
Gravelle, however, said the Bank of Canada expects this risk to \u201chave fully passed\u201d by the second half of 2027 because the final wave of mortgage renewals is set to happen over the next 12 months. <\/p>\n
On the plus side, Canada\u2019s big banks remain in \u201csolid financial health\u201d since they took steps to withstand potential economic shocks, according to the report, but ongoing trade tensions and geopolitical conflicts could make that more challenging. <\/p>\n
Bank profitability has increased as credit performance has stabilized and banks earned higher revenues from capital market activities. <\/p>\n
Banks have also continued to benefit from narrow funding spreads and strong investor appetite for their debt, the report said, and Canadian banks were among the first to issue bonds again as financial market conditions stabilized. <\/p>\n
But the reliance on deposits and funding from wholesale markets means Canadian banks are sensitive to shifts in global funding conditions, the central bank said. Further geopolitical shocks could disrupt these markets, raising borrowing costs or making it harder to issue new debt. <\/p>\n