Canada’s financial system remains stable despite growing uncertainty around the global economy, but the Bank of Canada says several risks are building beneath the surface as geopolitical tensions, high asset prices and growing debt in financial markets continue to increase.
In its 2026 Financial Stability Report released Thursday, on May 28, 2026, the central bank said Canadian households, businesses and banks have generally remained resilient through a year marked by trade uncertainty, overseas conflicts and market swings. At the same time, officials warned that multiple shocks happening together could create wider stress across the financial system.
Senior Deputy Governor Carolyn Rogers said stock market valuations, corporate debt levels and hedge fund borrowing have all moved higher compared with historical averages.
“Individually, these and other vulnerabilities look manageable,” Rogers said during the report’s release in Ottawa. “However, the economic and geopolitical environment has become more volatile.”
The Financial Stability Report is separate from the Bank of Canada’s interest rate decisions. Instead of forecasting the economy, it focuses on weaknesses in the financial system that could make future shocks worse.
The central bank said stock prices and corporate debt valuations are elevated, leaving markets more exposed to a sudden correction. It also pointed to the growing role of hedge funds in government bond markets, where many firms rely heavily on borrowed money to finance trades.
Bank officials said that activity can support liquidity during normal market conditions, but it can also add pressure if markets suddenly turn unstable.
Rogers warned that a combination of events could shake investor confidence, push investors to seek cash quickly and trigger rapid selling across markets.
“A cascading series of events could cause a sharp loss of investor confidence,” she said.
The report said trade tensions and tariff uncertainty remain a concern, even though the market impact has so far been less severe than the Bank of Canada expected last year.
The Bank of Canada also flagged artificial intelligence as an emerging risk. While AI is expected to improve productivity and support economic growth over time, officials said it could also lead to overinvestment in some sectors and increase the sophistication of cyber attacks.
Deputy Governor Toni Gravelle said Canadians still carry high debt loads relative to income, although household wealth has increased and the share of borrowers falling behind on payments has stabilized.
The central bank said many homeowners renewing mortgages taken out during the pandemic have managed higher payments better than expected. Officials now expect the largest wave of mortgage renewal pressure to ease by the second half of 2027.
Gravelle said some households remain far more vulnerable than others, especially those already carrying heavy debt loads.
“Those with the highest debt burden have very little financial flexibility to cope with a job loss or an unexpected expense,” he said.
The report said the biggest risk facing households and businesses would be a major economic or geopolitical shock that triggers a deep recession and rising unemployment.
Canada’s major banks were described as being in a stronger position than a year ago, supported by solid profits, stronger capital reserves and additional funds set aside to cover potential loan losses.
The Bank of Canada said financial markets have handled repeated periods of volatility over the past year without broader financial disruption.