The Bank of Canada has released their 2025 financial stability report. The report indicates the financial system remains resilient and household debt burdens have eased, though U.S. trade policy uncertainty poses a risk.
The debt-to-income ratio of households has dropped over the past 12 months, and business insolvencies are down. Canadian banks have not come under stress, with elevated capital buffers and high levels of liquidity ensuring high access to funding.
However, U.S. trade policy is an area of concern, with non-bank financial intermediaries exposed to U.S. Treasuries being tested amid rapid price changes. Further, financial stability could be put at risk by market volatility and ultimately market dysfunction due to unpredictable U.S. trade actions.
The report warns of lower economic growth and higher unemployment, as well as household and business debt defaults in the event of a prolonged global trade war. This could lead to banks facing greater-than-expected losses, resulting in reduced lending and exacerbating financial stress.
Canada’s banking system proved resilient during the global financial crisis and remains strong today. However, no system, no matter how stable, will remain unaffected if global trade significantly contracts. This underscores the need for Canada to rapidly eliminate interprovincial trade barriers and deepen ties with trade partners aside from the U.S.
You can read the full Financial Stability Report here.
Spencer Fernando
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