The Bank of Canada has released its Financial Stability Report, highlighting the stability of the Canadian financial system but also pointing out potential risks that remain. Governor Tiff Macklem emphasized that while adjustments have been made to higher interest rates and economic shocks, there are still risks to financial stability that need to be addressed.
One major concern is the stretched valuations of financial assets, particularly among non-bank participants such as pension funds and hedge funds. The report indicates a significant increase in leverage among these entities, which could lead to a sharp correction and system-wide stress if not managed properly.
Household debt is another area of concern, with non-mortgage holders experiencing financial distress, especially renters. The report shows that arrears on credit cards and car loans for these households have returned to pre-pandemic levels, indicating potential challenges in debt servicing.
Canadian businesses have also faced challenges, with insolvencies increasing sharply, particularly among small businesses. Factors such as higher borrowing costs and the phasing out of pandemic support programs have contributed to this financial distress.
While Canadian banks remain stable overall, there is a concern about the increase in mortgage arrears among small and medium-sized banks. This trend could indicate higher risk lending practices and potential vulnerabilities in the financial system.
Overall, the report highlights the need for continued monitoring and proactive measures to address the risks and vulnerabilities in the Canadian financial system to ensure long-term stability and resilience.