Key Takeaways
Canada’s Financial System Resilience
Canada’s financial system has shown resilience over the past year. Various participants, including households, businesses, banks, and non-bank financial institutions, have proactively adjusted to higher interest rates.
Ongoing Risks to Financial Stability
Despite this resilience, the Bank of Canada identifies two key risks to financial stability:
Debt Serviceability
- Adjustment to Higher Interest Rates: Both businesses and households are still adapting to increased interest rates.
- Financial Stress Indicators: During the COVID-19 pandemic, financial stress indicators were below historical averages but have since normalized. Some indicators are now rising more sharply, requiring close monitoring.
- Impact of Higher Debt-Servicing Costs: Increased costs reduce financial flexibility for households and businesses, making them more vulnerable to economic downturns.
Asset Valuations
- Stretched Valuations: Some financial assets appear overvalued, raising the risk of a sharp correction that could cause widespread stress in the financial system.
- Non-Bank Financial Intermediation: The recent increase in leverage in this sector could exacerbate the impact of such a correction.
Interconnected Financial System
Canada’s financial system is highly interconnected, meaning stress in one sector can quickly spread to others.
Proactive Measures Recommended
Participants should continue to take proactive steps, including preparing for potentially more adverse conditions or outcomes.
https://www.bankofcanada.ca/2024/05/financial-stability-report-2024/
