Bank of Canada Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers held a press conference today to discuss the Bank’s 2025 Financial Stability Report (FSR), offering an assessment of Canada’s financial system, noting its overall strength while warning of key risks, particularly due to the ongoing trade conflict with the United States.
The report acknowledges that Canada’s financial system has proven resilient, with households, businesses, and financial institutions successfully navigating the challenges of the COVID-19 pandemic, rising inflation, and higher interest rates. Despite this, it highlights ongoing concerns around household debt levels and vulnerabilities within certain business sectors.
“The financial system has remained resilient through recent challenges, but risks persist,” said Macklem. “While debt burdens have slightly decreased, they remain high for many households, and certain sectors, particularly those reliant on trade, are still vulnerable.”
The most significant challenge is the ongoing trade dispute with the United States. US trade policies have introduced serious uncertainty, and tariff increases have raised concerns about market volatility and financial stability.
Macklem explained that while the immediate impact has been manageable, the longer-term consequences of a prolonged trade conflict could reduce economic growth and lead to higher unemployment. This would, in turn, increase the risk of credit defaults, adding pressure on Canada’s financial system.
The FSR presented two scenarios for the future: one in which tariffs are reduced, leading to limited economic damage, and a more severe scenario where the trade dispute leads to a deep recession, widespread job losses, and an increase in household and business defaults.
The report also highlights ongoing financial pressures on Canadian households, especially those with mortgages. While the total debt-to-income ratio has slightly decreased, many households are still facing higher payments due to mortgage renewals. A further economic shock, such as a worsening trade war, could make it harder for these households to keep up with debt payments, leading to more defaults.
Businesses also face heightened risks. While larger firms have adapted to higher interest rates, smaller businesses with high debt and low cash reserves may struggle if the trade conflict continues.
Canadian banks remain in a strong position to absorb losses, with high capital levels and liquidity buffers. However, the Bank of Canada cautioned that widespread defaults could lead banks to reduce lending, which could make the economic downturn even worse.
The report also highlighted the growing role of non-bank financial intermediaries (NBFIs), such as hedge funds, in Canada’s financial system. The Bank expressed concerns that these entities, which have become more active in government bond markets, could exacerbate financial stress if they were forced to quickly unwind leveraged positions during times of market volatility.
Governor Macklem emphasized the need for continued vigilance in the face of potential financial turbulence. “The Canadian financial system is resilient, but we must remain prepared for challenges ahead,” he said.