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/