Bank of Canada governor Tiff Macklem speaks with reporters following the release of the bank’s latest financial stability report. He is joined at the news conference in Ottawa by senior deputy governor Carolyn Rogers.
Bank of Canada Governor Tiff Macklem, alongside Senior Deputy Governor Carolyn Rogers, addressed the media today to delve into the details of the Bank’s newly unveiled Financial Stability Report (FSR). The event, held in Ottawa, shed light on the critical assessment of Canada’s financial landscape and underscored the imperative of preserving the stability of the nation’s financial system.
Macklem opened the discussion by emphasizing the Bank’s core mandate of safeguarding and fostering the stability of the Canadian financial system. He emphasized the significance of a robust financial system in facilitating secure access to credit and asset management, particularly during periods of economic volatility. The governor reiterated that a stable financial system is paramount to Canada’s economic prosperity, reducing the necessity for regulatory intervention during financial turbulence.
An annual tradition, the release of the Financial Stability Report serves as a comprehensive evaluation of Canada’s financial system, highlighting potential risks that could undermine its stability. Noteworthy in this year’s report is the renaming from the Financial System Review to the Financial Stability Report, aimed at succinctly conveying its purpose.
Macklem elucidated on the interconnected nature of the Canadian financial system, stressing that vulnerabilities in one sector could permeate others, posing systemic risks. Thus, the FSR meticulously examines risks that could engender widespread stress across four pivotal sectors: households, businesses, banks, and non-bank financial institutions, including pension funds and insurance companies.
In his address, Macklem delineated two key messages derived from the latest FSR. Firstly, he affirmed that Canada’s financial system retains resilience, attributing this resilience to proactive measures undertaken by various stakeholders in response to heightened interest rates and economic shocks. However, he cautioned that the adjustment process is ongoing, presenting persistent risks to financial stability.
The governor proceeded to contextualize the assessment, alluding to the diminished risk of recession both domestically and globally over the past year. Yet, he warned of market volatility amidst uncertainties regarding central bank policy rates and lingering geopolitical and economic risks. Notably, Macklem underscored concerns surrounding stretched asset valuations and escalating leverage within the non-bank financial sector, which could exacerbate systemic vulnerabilities.
Transitioning the discussion to sector-specific risks, Senior Deputy Governor Carolyn Rogers provided insights into household, business, banking, and non-bank financial sectors. Rogers noted the resilience exhibited by most households in the face of mounting interest rates and inflation, although indicators of financial stress have resurfaced, particularly among renters and non-mortgage holders.
Moreover, Rogers shed light on the financial challenges confronting businesses, with smaller enterprises exhibiting heightened signs of distress amidst increased financing costs. She reassured, however, that Canadian banks maintain robust credit performance and liquidity buffers, bolstering their capacity to weather adverse conditions.
In conclusion, Macklem reiterated the imperative of proactive risk management within the financial system, underscoring the interconnectedness that necessitates preparedness. He commended the proactive measures undertaken by stakeholders thus far but emphasized the continual need for vigilance to ensure a stable and resilient financial system for all Canadians.
To a question about changes in concerns over the past year, Governor Macklem emphasized the evolving landscape of household and business debt servicing. While households have managed relatively well amid rising interest rates, Macklem highlighted an increase in financial stress among non-mortgage holders, particularly renters. Additionally, he expressed concerns regarding stretched asset valuations and heightened leverage in the non-bank financial sector, emphasizing the potential for market corrections to amplify systemic vulnerabilities.
Responding to inquiries about the impact of impending mortgage resets on the economy, Macklem acknowledged the challenges facing mortgage holders and underscored the significance of household spending restraint in light of higher interest rates. He emphasized the Bank’s comprehensive data analysis of mortgage renewals, stressing the importance of proactive risk management by households and financial institutions to mitigate potential vulnerabilities.
Regarding the disproportionate impact of interest rates on renters compared to mortgage holders, Macklem noted renters’ higher vulnerability to economic cycles due to lower incomes and savings. While acknowledging the role of interest rates in exacerbating financial strain for renters, he highlighted broader economic factors such as inflation as contributing to their challenges.
On the topic of interest rate relief, Macklem reiterated the Bank’s holistic approach to monetary policy formulation, incorporating insights from the Financial Stability Report alongside other economic indicators. He emphasized the critical role of interest rates in curbing inflation and safeguarding household financial stability, emphasizing the need for a balanced approach to monetary policy.
In response to queries about contagion risks stemming from smaller banks and leverage in financial markets, Senior Deputy Governor Rogers provided reassurance regarding the resilience of Canadian banks and the proactive measures taken to manage potential risks. She highlighted the differences in business models between small and large banks, attributing variations in stress indicators to their respective market segments. Rogers emphasized the importance of managing leverage in financial markets to mitigate the potential for amplifying losses and systemic contagion.
As Canada navigates evolving economic landscapes, the insights gleaned from the Financial Stability Report serve as a compass guiding policymakers and market participants towards informed decision-making, bolstering the nation’s financial resilience in an ever-changing world.