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Ashley Quinn

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Bank of Canada: Financial Stability Report

5/10/2024

Key takeaways

  • Canada’s financial system remains resilient. Over the past year, financial system participants—including households, businesses, banks and non-bank financial institutions—have continued to proactively adjust to higher interest rates.
  • However, risks to financial stability remain. The Bank sees two key risks to stability, related to:
    • Debt serviceability—Businesses and households continue to adjust to higher interest rates. Indicators of financial stress in both sectors were below historical averages through the COVID-19 pandemic but have been normalizing. Some indicators look to be increasing more sharply and warrant monitoring. Higher debt-servicing costs reduce financial flexibility for households and businesses and make them more vulnerable in the event of an economic downturn.
    • Asset valuations—The valuations of some financial assets appear to have become stretched, which increases the risk of a sharp correction that can generate system-wide stress. The recent rise in leverage in the non-bank financial intermediation sector could amplify the effects of such a correction.
  • The financial system is highly interconnected. Stress in one sector can spread to others.
  • Participants should continue to be proactive, including planning for more adverse conditions or outcomes.

https://www.bankofcanada.ca/2024/05/financial-stability-report-2024/

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