BoC sees financial system resilience despite global turbulence

The Bank of Canada says the financial system has proven resilient after a turbulent year but officials at the central bank warn risks are mounting on the world stage.

The bank released its annual financial stability report Thursday, outlining where it sees the biggest risks to markets, households and the broader financial system.

Senior deputy governor Carolyn Rogers stressed in prepared remarks that the report is not a forecast, and does not guide interest rate decisions.

The central bank’s report lays out a series of risks related to geopolitics, artificial intelligence and global sovereign debt activity.

Rogers said that, taken one by one, those vulnerabilities look “manageable.”

But she warned that a significant shock to the economy could trigger multiple vulnerabilities at once, driving a cascading effect that tests Canadian financial resilience.

“The economic and geopolitical environment has become more volatile. And this has made it more likely that a new shock or combination of shocks could cause several vulnerabilities to crystalize at once,” Rogers said.

A year ago, much of the financial stability report focused on risks from the United States’ tariffs.

Uncertainty remains on the trade front, Rogers noted Thursday. But so far, the consequences of those disruptions have not been as bad as the Bank of Canada first feared.

More recently, the bank has been preoccupied with the war in Iran and the impact on global markets – but officials indicated the financial system is so far proving stable through that uncertainty, too.

A lack of clarity around the length of the conflict and how it might resolve remain a risk.

Persistently high global oil prices tied to the Iran war, if accompanied by stress in financial markets, could test Canadian resilience, the report warned. Such a scenario could see inflation rise and monetary policy hold tight, while unemployment ticks higher and home prices fall.

Artificial intelligence is, meanwhile, sparking concern about disruption in certain industries, the prospect of overinvestment and risks of increasingly sophisticated cyberattacks.

Despite those headwinds, the Bank of Canada sees households and businesses as broadly financially healthy.

Past financial stability reports have also highlighted risks tied to a looming wave of mortgage renewals, as homeowners who bought during the pandemic-era peak saw their loans turn over at higher rates of interest.

But officials now expect that pressure will mostly alleviate a year from now as the final wave of mortgage renewals passes over the next 12 months.

Canadian banks have enjoyed strong profitability and are setting aside more funds to cover bad loans, the report noted, insulating them from the risks of a severe downturn.

While Canada has faced some strains over the past year, deputy governor Toni Gravelle said in prepared remarks that those episodes have not led to broad-based financial stress.

Gravelle noted that the aggregate figures can mask vulnerabilities, and households with the highest debt burden are least able to absorb financial shocks like a sudden job loss.