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A stable and efficient financial system is essential for sustaining economic growth and raising living standards. In the Financial System Review, the Bank of Canada identifies the main vulnerabilities for and risks in the financial system in Canada and explain how they have evolved over the past year.

The Financial System Review is a product of the Governing Council of the Bank of Canada: Tiff Macklem, Carolyn Rogers, Timothy Lane, Lawrence Schembri, Paul Beaudry, Toni Gravelle and Sharon Kozicki.


The Canadian financial system has proved resilient throughout the COVID‑19 pandemic, and the balance sheets of businesses and households are generally in good shape. However, in an environment of tightening financial conditions, high global inflation and increased geopolitical tensions, financial system vulnerabilities have become more complex, and risks have become more elevated.

The Bank is paying particular attention to the fact that a greater number of Canadian households are carrying high levels of mortgage debt. These households are more vulnerable to declines in income and rising interest rates. While the sharp increase in house prices over the past year has resulted in significant equity gains for many households, those who entered the housing market in the last year or so would be more exposed in the event of a significant price correction.

The vulnerabilities highlighted in this report suggest the effects for the real economy could be significant if a trigger event occurs, even as systemically important financial institutions remain resilient.

What you need to know about the Bank of Canada’s latest assessment of vulnerabilities and risks to Canada’s financial system – in brief.

Key messages

  • Central banks around the world have shifted their focus from providing pandemic-related stimulus to responding to the significant increase in inflation. The lasting effects of the pandemic on supply chains in the context of strong demand for goods and the ongoing Russian invasion of Ukraine are complicating these efforts. The tightening of monetary policy globally will test the resilience of the financial system and could worsen existing financial vulnerabilities.
  • In Canada, elevated levels of household debt and high house prices remain two key interconnected vulnerabilities. Many households have seen an improvement of their net worth and liquid asset holdings over the course of the pandemic. At the same time, the share of highly indebted households has risen. Those with high debt are more vulnerable to a decline in income and will face more financial strain when they renew their mortgages at higher rates.
  • House prices rose more than 50%, on average, during the pandemic. Expectations of future price increases and increased investor demand likely contributed to this rise. A moderation of housing markets could reverse these forces and amplify the decline in prices. Significant drops in prices would reduce household wealth and access to credit.
  • Publicly traded non-financial businesses are generally in good financial shape and appear well-positioned to handle higher interest rates. Previously, concerns were that the pandemic would cause unsustainably high levels of debt across the non-financial sector. But this has not occurred. The vulnerability associated with the reliance of some businesses on high-yield debt markets has also diminished.
  • Fragile liquidity in fixed-income markets is an ongoing structural vulnerability. A sudden spike in demand for liquidity from asset managers could exceed the willingness of banks to supply such liquidity, causing large price movements and a potential freeze in some markets. The recent tightening in financial conditions and increased market volatility have reduced liquidity.
  • Cyber threats represent a continued vulnerability given the interconnected nature of the financial system. With the ongoing war in Ukraine, state-sponsored cyber attacks are occurring with greater frequency and sophistication, increasing the risk of a successful attack on a Canadian financial institution or financial market infrastructure. Such an attack could have far-reaching effects on the broader financial system.
  • The war in Europe has further complicated the transition to a low-carbon economy. In the short term, concerns around global energy security are likely to delay the transition, while the long-term impact is highly uncertain. Overall, the risk of a quick repricing of assets exposed to climate change has increased.
  • Cryptoasset markets continue to evolve and grow rapidly, and price volatility remains high. While they do not yet pose a systemic risk to the Canadian financial system, the lack of a regulatory framework means they operate without many of the safeguards that exist in the traditional financial system. This exposes investors to risks such as large and sudden financial losses due to fraud, price declines or a run on stablecoins.

Global macrofinancial conditions

  • As the global economy emerges from the COVID‑19 pandemic, several factors have combined to increase volatility in financial markets and reduce investors’ appetites for risky assets. Amid rising global inflationary pressures, major central banks have entered a phase of monetary policy tightening. At the same time, Russia’s invasion of Ukraine has increased volatility in commodity markets and uncertainty more generally, causing significant repricing in some financial markets as investors seek safer assets. The tightening of global financial conditions could more clearly expose existing financial vulnerabilities and will test the resilience of the global financial system. New outbreaks of COVID‑19 in China and associated lockdowns are another source of concern for the global economy and inflation.

Over the past year, inflation has risen worldwide. Many economies have lifted pandemic-related restrictions, leading to robust demand, which has met with global supply constraints. In addition to causing untold human suffering, Russia’s invasion of Ukraine is also adding to inflationary pressures, both by boosting commodity prices and creating additional supply chain issues.

As a result of rising inflation, investors expect major central banks to withdraw a significant amount of monetary policy stimulus. Central banks may substantially increase their policy rates and reduce their balance sheets through quantitative tightening.1 Expectations of both tighter monetary policy and higher inflation have led to a sharp rise in nominal sovereign bond yields around the world (Chart 1). This abrupt repricing in sovereign bonds has happened alongside higher volatility in other asset classes (Chart 2).

Source: Bloomberg Finance L.P.Last observation: June 7, 2022

Note: The Merrill Lynch Option Volatility Estimate (MOVE) is a weighted index of implied volatility on 1-month Treasury options and reflects near-term bond market sentiment. The VIX volatility index is derived from options on the S&P 500 index and reflects near-term equity market sentiment.
Source: Bloomberg Finance L.P.Last observation: June 7, 2022

Global financial conditions are tighter than they were last year. Excluding the period of market turmoil in March and April 2020, yields on corporate bonds are at multi-year highs. Borrowing rates for households have increased substantially. Five-year fixed mortgage rates have reached levels last seen in 2010. Corporate credit spreads have widened, and most global equity indexes are down significantly in 2022. Investors’ appetites for risky assets have weakened, particularly for technology stocks and cryptoassets, leading to sharp declines in prices and valuations.

The tightening of global financial conditions could expose existing financial vulnerabilities. It could reignite concerns about market liquidity in the event of an episode of severe financial stress (see “Fixed-income market liquidity”). Tightening could also interact with vulnerabilities in emerging-market economies (EMEs)—such as high public and private debt, foreign exchange exposures and large current account deficits—and trigger capital outflows. Concerns about corporate leverage in the property sector in China could intensify further. Finally, tighter financial conditions will put pressure on government finances given higher levels of debt taken on during the pandemic. Fiscal sustainability is a particularly acute concern for some EMEs.

Russia’s invasion of Ukraine is compounding the risks to global financial stability. The war is affecting the global economy through many channels.2 It has increased global uncertainty. As mentioned, the sharp rise in commodity prices and the additional disruptions to supply are adding to already elevated inflationary pressures. In this context, central banks face a delicate balancing act. They must reduce inflation while seeking to safeguard both the recovery from the pandemic and overall financial stability. Failure to balance these competing objectives could lead to a further global repricing of risk and a sharp tightening of global financial conditions, potentially triggering risks associated with high leverage.3 The conflict in Europe has also introduced a short-term trade-off between energy security and transition plans in response to climate-related risks and has increased cyber risks (see “Climate change considerations” and “Cyber security”).

These global risks represent important potential threats to financial stability in Canada, and their implications are examined later in this report. The next section focuses on vulnerabilities within the Canadian economy and financial system.

Vulnerabilities in the Canadian financial system

The Bank is committed to promoting the economic and financial welfare of Canada. As part of this commitment, the Bank identifies and monitors areas of vulnerability in the economy and the financial system. Vulnerabilities are pre-existing conditions that can lead to episodes of financial stress or even a financial crisis. They can amplify and further spread shocks throughout the financial system. The interaction between vulnerabilities and shocks can bring about risks that can impair the financial system and harm the economy. Reducing and managing vulnerabilities increases the resilience of the financial system and supports financial stability.

At this time, the Bank sees six key vulnerabilities in the financial system:

  • Vulnerability 1: Elevated level of household indebtedness
  • Vulnerability 2: Elevated house prices
  • Vulnerability 3: Reliance of some businesses on high-yield debt markets
  • Vulnerability 4: High potential demand for market liquidity relative to supply
  • Vulnerability 5: Cyber threats in an interconnected financial system
  • Vulnerability 6: Mispricing of assets exposed to climate-related risks

The Bank also monitors the rapid evolution of cryptoasset markets.

This section discusses these vulnerabilities, grouped by the area they are mainly associated with:

  • households and the housing market (Vulnerability 1 and Vulnerability 2)
  • non-financial businesses (Vulnerability 3)
  • the financial system (Vulnerability 4, Vulnerability 5 and Vulnerability 6)

Households and the housing market


  • Assessing the ongoing vulnerability associated with the elevated level of household indebtedness (Vulnerability 1) has become more complex over the past two years. Overall, however, the vulnerability has increased. This vulnerability relates to households’ ability to continue servicing their debt if incomes decline or interest rates rise, without having to significantly reduce their consumption. Rising asset prices, including those for real estate, along with higher liquid assets have pushed up the net worth of most homeowners, strengthening their resilience to a negative income shock. But Bank staff estimate that the most highly indebted households have generally seen the smallest increases in liquid assets. At the same time, alongside higher house prices, a growing number of households have taken out sizable mortgages to purchase a house, adding to the already large share of highly indebted households.
  • These developments are taking place in the context of rising interest rates, high inflation and elevated house prices (Vulnerability 2), which pose their own set of risks for households and the economy. Higher interest rates at the time of mortgage renewal will significantly reduce the financial flexibility of some households, particularly the most indebted (Box 1). Elevated inflation will erode the purchasing power of households if wages do not rise in tandem. Finally, homeowners—particularly the most indebted—may not be able tap into home equity if house prices were to experience a correction (see “A large decline in household income and house prices”).

The financial health of households has generally improved since the start of the pandemic, particularly over 2021. Net worth increased on average by $230,000 per household between the fourth quarter of 2019 and the fourth quarter of 2021, reflecting three key factors:

  • Increased residential assets (Chart 3, blue bars)—House prices rose strongly across the country (Vulnerability 2), boosting homeowners’ wealth. Real estate assets account for two-thirds of the growth in net worth since the fourth quarter of 2019.
  • Increased financial assets (Chart 3, green bars)—With stock markets reaching new highs during the pandemic, households that have financial assets tied to the stock market (either directly or through mutual or pension funds) generally saw the value of their equity portfolios grow. The recent decline in stock markets still leaves equity valuations about 15% higher than their pre-pandemic levels.
  • Higher bank deposits (Chart 3, yellow bars)—In addition to paying down debt and increasing investments in residential and financial assets, households have expanded their holdings of liquid assets.

Overall, households have also increased their liabilities (Chart 3, red bars), with higher mortgage debt more than offsetting lower consumer debt. Many households have taken on large mortgages relative to their income in the context of elevated house prices. At the same time, households have reduced their use of other forms of credit. For instance, in March 2022, total outstanding balances on credit cards were 9% lower than they were in February 2020. Balances on home equity lines of credit were 6% lower. The share of Canadians falling behind on consumer debt payments, at about 2%, remains close to its historical low.4

Sources: Statistics Canada and Bank of Canada calculationsLast observation: 2021Q4

Looking beyond average balance sheet statistics to evaluate household vulnerabilities is important. The increase in overall net worth seen in 2020 and 2021 hides important changes to its distribution and composition across households. Also unclear is the capacity for some households to service their debt in the event of a loss in income. Typically, when households allocate a larger share of their income to debt payments and have fewer liquid assets or limited access to credit, they must cut back on consumption by more if their disposable income declines (see “A large decline in household income and house prices”).

Many aspects of the ongoing vulnerability related to elevated household indebtedness (Vulnerability 1) have evolved in opposing directions since the start of the pandemic.

  • The Bank’s analysis suggests that households across different levels of indebtedness have generally increased their holdings of liquid assets relative to 2019, adding to their financial resilience.5 However, the Bank estimates that the increase in liquidity buffers during the pandemic is smallest for highly indebted households (Chart 4). This group of borrowers includes many first-time homebuyers who have put their extra pandemic savings toward their down payment.

Note: Values for 2021 were estimated using the new version of the Household Risk Assessment Model. Numbers in parentheses are the estimated share of indebted households in each group in 2021. Liquid assets include cash, bank deposits and savings, bonds, mutual funds and stocks but exclude pension and retirement funds.
Sources: Statistics Canada and Bank of Canada calculationsLast observation: 2021

  • Most homeowners have more home equity to borrow against if they experience an income shock, but the gains are lowest for those who purchased a house most recently. Households that have enough equity in their house can use home equity lines of credit or mortgage refinancing to access some of this capital in times of financial stress.6 Given the large increase in house prices since 2020, most highly indebted households have improved their equity positions. However, households that bought a property in recent quarters have generally seen the smallest gains and have increasingly made small down payments relative to the purchase price. The number of new mortgages with a loan-to-value ratio of 75% or more increased 40% over this period.7 Combined, these developments suggest that many recent homebuyers would have limited access to secured forms of credit in the event of a decline in income.
  • A rising number of households have financially stretched to purchase a house amid elevated house prices. Increasingly over the past year, households have taken on mortgages that are large relative to their income and have opted for variable mortgage rates and longer amortization periods (Chart 5).8 The growing share of new mortgages taken out by borrowers with elevated loan-to-income ratios implies that the overall proportion of highly indebted households likely surpassed its pre-pandemic peak in 2021 (Chart 6), increasing the risk to macrofinancial stability (see “A large decline in household income and house prices”).9, 10

Note: Data include purchases and refinancing originated by federally regulated financial institutions. Low-ratio mortgages have a loan-to-value ratio of 80% or less.
Sources: Regulatory filings of Canadian banks and Bank of Canada calculationsLast observation: 2022Q1

Note: Indebted households represented 62% of all households in 2019.
Sources: Statistics Canada and Bank of Canada calculationsLast data plotted: 2021

  • Higher interest rates will increase the vulnerability of highly indebted households. Even with a high debt load, households have generally been able to manage their debt servicing costs due to low interest rates since the start of the pandemic. But as mortgages are renewed at higher rates, some households—particularly those that took on a sizable mortgage since the start of the pandemic—will face significantly larger mortgage payments (Box 1). All else being equal, higher interest costs would greatly reduce their financial flexibility in the event of an income shock.
Box 1: The potential impact of higher interest rates on future mortgage payments

Box 1: The potential impact of higher interest rates on future mortgage payments

Mortgage rates have risen considerably in recent months (Chart 1-A). About one-third of all households have a mortgage (Chart 1-B), and rising mortgage rates could result in a significantly tighter budget for them. To understand the direct impact of higher rates on mortgaged households, Bank staff used loan-level data to project what debt servicing costs could look like at the time of mortgage renewal.11, 12

Sources: Lender Spotlight and Bank of CanadaLast observation: June 7, 2022

Note: The living and mortgage arrangements of “All households” are based on the primary residence of households in the 2019 Survey of Financial Security from Statistics Canada.
Sources: Statistics Canada, regulatory filings of Canadian banks and Bank of Canada calculationsLast observation: 2021Q4

The simulation focuses on mortgages with a five-year term taken out at banks over 2020⁠–⁠21, either for a new home purchase or to refinance an existing mortgage. The sample of 1.4 million mortgages represents about three-quarters of all mortgages issued by federally regulated financial institutions over these two years.

These households are at greater financial risk at the time of renewal compared with other cohorts of mortgage holders for two main reasons:

  • These households will see the largest rate increase because they took out a mortgage when rates were at or near record lows. This is particularly true for the historically large number of households that opted for variable-rate mortgages.
  • A larger share of households took out mortgages that were large relative to their income, reflecting the rise in house prices.

For the purposes of this simulation, it is assumed that variable- and fixed-rate mortgages originated in 2020–21 will renew at median rates of 4.4% and 4.5%, respectively, in 2025⁠–⁠26.13 These mortgage rates are hypothetical and do not represent a forecast. The intention is to show how sensitive mortgage debt payments can be to reasonable increases in mortgage rates based on market expectations.14

In this scenario, households that took out a mortgage in 2020⁠–⁠21 would experience a median increase of $420, or 30%, in their monthly mortgage payments upon renewal (Table 1-A). Borrowers who took out a variable-rate mortgage would see a median increase in their mortgage payment of more than $700 per month. Those with fixed-rate mortgages would see a smaller increase of $300. The difference is because borrowers on variable rates generally took out larger mortgages during the pandemic and benefited from a historically large discount relative to fixed rates. The median increase in monthly mortgage payments in this exercise is greater for highly indebted households (those with loan-to-income ratios above 450%), reaching over $1,000 for those on a variable rate.

Table 1-A: Potential increases in monthly mortgage payments at renewal Median monthly increases based on a hypothetical higher mortgage rate
  Number of mortgages subject to the increase in mortgage rates Median monthly mortgage payment
At origination At renewal Change
All mortgages originated in 2020–21
All 1,400,000 $1,390 $1,810 +$420
High loan-to-income ratio 300,000 $2,080 $2,840 +$760
Fixed-rate mortgages
All 860,000 $1,260 $1,560 +$300
High loan-to-income ratio 140,000 $1,880 $2,370 +$490
Variable-rate mortgages
All 540,000 $1,650 $2,370 +$720
High loan-to-income ratio 170,000 $2,260 $3,280 +$1,020

Note: “High loan-to-income ratio” includes mortgages that had a loan-to-income ratio above 450% at origination. The number of households is rounded to the nearest 10,000. Dollar values are rounded to the nearest $10. Numbers may not add up due to rounding.

Highly indebted households will feel the impact of higher interest costs on their budget. This simulation does not account for rising interest costs on other debt households may carry, such as lines of credit and auto and personal loans. Elevated inflation could also mean that households allocate more of their income to necessities such as food and gasoline if wage increases do not keep pace. These factors suggest that some households will need to cut spending to service their debt as interest rates rise. In this context, highly indebted households are especially vulnerable to a loss of income, particularly if combined with a decline in house prices (see “A large decline in household income and house prices”).

The housing market

  • The vulnerability associated with elevated house prices (Vulnerability 2) increased further over the past year. Key developments in the housing market—strong demand relative to supply, driven partly by an increasing share of investors; prices reaching all-time highs in most regions; and expectations that these price increases will continue in most major cities—point to further imbalances in prices compared with a year ago.
  • A large misalignment of house prices relative to longer-term fundamentals could lead to an abrupt price correction in the future. Such a correction can, in turn, bring on financial stress for households because housing often represents their largest asset (see “A large decline in household income and house prices”).
  • It is too early to tell whether the recently observed decrease in resale activity and prices will be temporary or is the start of a deeper, lasting decline. A sudden reversal of the influx of housing investors seen during the pandemic could amplify downward pressure on prices (Box 2).

After months of exceptionally strong activity in the housing market, resales slowed considerably in March and April 2022 (Chart 7). Until the early months of 2022, demand—including from investors—was remarkably robust, supported by a desire for more housing space, record-low mortgage rates and the accumulation of extra savings. Resales are expected to soften as borrowing rates rise and the pandemic-induced demand for more housing space wanes. Recent monthly data reveal a large decline in resale activity. This could reflect a temporary echo effect from some homebuyers making their purchases earlier to avoid the latest mortgage rate increases, or it could signal the beginning of the end of the pandemic upswing.

Source: Canadian Real Estate AssociationLast observation: April 2022

Growth in house prices has been vigorous and regionally broad-based. In April 2022, house prices were up 24% nationally compared with April 2021, and up 53% relative to April 2020. Despite house prices increasing in nearly all areas, suburbs have experienced the strongest growth—as seen in the Toronto and Montréal regions (Figure 1).15 This dynamic is consistent with the pandemic-induced shift in preferences for more housing space, which is more affordable and widely available in suburban and rural areas than it is in city centres.

Figure 1: House price growth in the Toronto and Montréal regions has been stronger in the suburbs than in city centres

Year-over-year percentage change in the House Price Index for all property types, by forward sortation area, 2022Q1

a. Toronto region

20% 40% 30% 50% 10% City centre

b. Montréal region

40% 50% 30% 20% 10% City centre

Sources: Teranet, National Bank and Bank of Canada calculationsLast observation: 2022Q1

Description: Growth in house prices

Figure 1 is a map that shows the growth in house prices in the Toronto and Montréal regions. In these regions, growth has been stronger in the suburbs than closer to the city centre.

The map displays the year-over-year percentage change in the Teranet and National Bank House Price Index for all property types, by forward sortation area, measured in the first quarter of 2022. In forward sortation areas close to the city centre, growth was lower, generally around 10%. The growth rate generally increases along with the distance from the city centre, reaching close to 50% in some locations.

Part of the exceptional increase in house prices observed since the start of the pandemic may have reflected extrapolative price expectations. This happens when people come to expect that house prices will rise in the future simply because they have risen in the past. In such a situation, homebuyers may rush into the market out of fear of missing out or may hope to realize a sizable capital gain. Under these conditions, housing demand and prices can then become disconnected from underlying fundamentals, putting prices at risk of a correction in the future. Extrapolative expectations, particularly among investors, could amplify and accelerate price declines if a house price correction were to occur. Such a correction could dampen economic activity not only through confidence effects but also because it reduces household wealth and restricts access to credit (see “A large decline in household income and house prices”). Although house prices declined in April 2022, it is too early to tell whether this is the beginning of a substantial correction in prices.

Before the tightening of monetary policy in March, extrapolative expectations appeared to have broadened. The Canadian Survey of Consumer Expectations conducted in February revealed that many Canadians were expecting house prices to increase substantially over the next year. In fact, this is the highest rate for this response since the Bank introduced this survey question in 2016. These elevated expectations also appeared to be broadening. For the first time, the Bank’s House Price Exuberance Indicator characterized house prices in most major Canadian cities as exuberant in the first quarter of 2022 (Chart 8).16 However, these indicators were collected before the slowdown in housing activity and price growth in April. It remains to be seen whether data for the second quarter will support the same conclusion.

Chart 8: Most large cities now show exuberance in house prices

House price exuberance heat map

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Victoria Calgary Winnipeg Greater Toronto Area Hamilton Ottawa Montréal Québec HPEI is below 0.95 HPEI is from 0.95 to 1.00 HPEI is above 1.00 (housing prices deemed to be exuberant) Greater Vancouver Area

Note: HPEI is the House Price Exuberance Indicator.
Source: Bank of Canada calculationsLast observation: 2022Q1

Description: Most large cities now show exuberance in house prices

Chart 8 is a heat map that shows the House Price Exuberance Indicator for nine major Canadian cities. The cities are Victoria, the Greater Vancouver Area, Calgary, Winnipeg, Hamilton, the Greater Toronto Area, Ottawa, Montréal and Québec. The sample ranges from the first quarter of 2012 to the first quarter of 2022.

The heat map is characterized by three separate colour groupings. When the house price exuberance indicator of a given city is below 0.95, the heap map displays shades of green. When the indicator is between 0.95 and 1.00, the heat map is coloured in shades of orange. Finally, when the indicator exceeds 1.00, the heat map shows shades of red, meaning the housing market is deemed to be exuberant.

For the first quarter of 2022, the house price exuberance indicator identifies five cities showing signs of house price exuberance (shades of red): the Greater Vancouver Area, Hamilton, the Greater Toronto Area, Ottawa and Montréal. The indicator does not detect signs of house price exuberance elsewhere (shades of green).

The share of Canadians buying homes as investment properties grew in 2021. The increased presence of investors in the real estate market can amplify the vulnerability associated with elevated house prices (Box 2).

Box 2: Vulnerabilities associated with investors in residential real estate

Box 2: Vulnerabilities associated with investors in residential real estate

In an environment of low mortgage rates and rapid increases in house prices, expectations of a large capital gain can make houses an attractive asset for investors. For the purpose of this analysis, investors are defined as existing mortgage holders who obtain an additional mortgage to purchase a property. In 2021, they made purchases at a faster pace than first-time or repeat homebuyers. Investors accounted for over 22% of mortgaged purchases in the fourth quarter of 2021, up from 19% in 2019 (Chart 2-A).17

Sources: Regulatory filings of Canadian banks, TransUnion and Bank of Canada calculationsLast observation: 2021Q4

Investors are increasingly extracting equity from their existing properties to support new purchases. The share of investors who took out at least $5,000 in equity in the three months before they purchased an investment property rose substantially since the start of the pandemic (Chart 2-B). The amount of equity these investors took out through home equity lines of credit or mortgage refinancing also noticeably increased. For about one-third of these investors, the equity extracted was equal to or greater than the down payment on their subsequent purchase. This proportion is up from just over one-fifth in 2019. The increased use of equity gains to finance purchases highlights the feedback loop between rapid gains in house prices and the stronger demand for housing that investors generate.

Note: These investors have taken out at least $5,000 in equity in the three months before they purchased an investment property.
Sources: TransUnion, regulatory filings of Canadian banks and Bank of Canada calculationsLast observation: 2021Q4

Investors can amplify house price cycles. Investors can play an important role in the housing market if they make their property available to renters on a long-term basis. But investors can also increase vulnerabilities linked to higher house prices:18

  • During housing booms, greater demand from investors can add to bidding pressures and intensify price increases.
  • When prices are stable or declining or mortgage carrying costs are rising, holding real estate as an investment becomes less attractive. The incentive to sell may be greater for investors who risk falling into a negative equity position on one or more properties, also known as being “underwater.” A negative equity position can prevent the future sale of a property if the investor does not have enough liquid assets to cover the shortfall.

Although investors typically earn more income than non-investors, they tend to have higher loan-to-income ratios, once all the mortgages they hold are accounted for, and higher debt servicing costs.19, 20 If an income shock occurs—whether a reduction in employment or rental income because, for example, some tenants become unemployed—highly leveraged investors may need to sell one or more of their properties to recover some liquid assets. Although investors may not be considered as financially vulnerable as non-investor households given the amount of equity they have tied up in real estate, investors could intensify the effect of an economic slowdown by adding downward pressure on housing demand and prices.

Implications for downside risks to future growth in gross domestic product

The vulnerabilities associated with elevated household indebtedness and high house prices increase the downside risks to future growth in gross domestic product (GDP). The robust growth in household credit and house prices observed since the beginning of the pandemic supports short-term economic growth. But over the medium term, it also contributes to increasing the likelihood of a negative outcome on growth (Chart 9).21

Note: Inputs from 2022Q1 feeding into the forecast of growth at risk are based on the projection scenario in the April 2022 Monetary Policy Report.
Source: Bank of Canada calculations

The buildup of vulnerabilities changes the distribution of future GDP growth. To illustrate this point, Chart 10 shows the projected distribution of growth for the first quarter of 2024. Compared with a scenario in which household debt and house prices remained constant between the first quarter of 2020 and the first quarter of 2022 (Chart 10, purple dotted line), projected growth (Chart 10, orange line) is both lower and has a greater probability of being negative. The probability of negative growth in the first quarter of 2024 is nearly two times greater given the current level of vulnerabilities. This is because the presence of these two financial vulnerabilities would likely amplify the impact on consumption and GDP if an economic disruption were to lower household income or considerably weaken activity in the housing market (see “A large decline in household income and house prices”).

Source: Bank of Canada calculations

Non-financial businesses

  • The health of non-financial businesses has generally improved over the past year alongside the easing of public health restrictions. Previously, concerns were that these businesses could emerge from the pandemic with high debt levels. But this has not occurred to date. Publicly listed businesses are the only group for which timely firm-level data are available. The share of these businesses with inadequate revenues and cash buffers has returned to near pre-pandemic levels. This improvement is due in part to the favourable impact that rising commodity prices are having on corporate balance sheets in the resource sector—a sector where firms have historically been more financially vulnerable. Publicly listed businesses are also well positioned overall to deal with rising interest rates.
  • The reliance of some businesses on high-yield debt markets (Vulnerability 3) is judged to be less problematic than previously estimated. New firm-level data confirm that businesses that issue high-yield bonds have other sources of funding available to them, notably bank loans and lines of credit (Box 3). These firms do not appear to pose a systemic risk to macrofinancial stability.

Corporate balance sheets have generally improved over the past year. The pandemic has been challenging for many businesses. Lockdowns and public health restrictions significantly reduced revenues for some, and supply chain disruptions continue to test business models. However, the easing of containment measures has helped the economic recovery, improving the financial health of many businesses. According to the national balance sheet accounts, the economy-wide leverage of non-financial businesses, measured by the ratio of total debt to assets, has declined continuously since its peak in the second quarter of 2020.22 Liquidity, measured by the ratio of total cash to debt, has also reached all-time highs among firms.

Although microdata are not available for small and medium-sized businesses, data from the financial statements of publicly listed firms offer a similar conclusion. Firms at risk are defined as those not generating enough income to cover interest payments on their debt and having limited liquid assets to meet near-term debt obligations. The share of these firms has returned to pre-pandemic levels (Chart 11).23 This is in part because firms operating in the resource sector benefited from an increase in global commodity prices in 2021. Although 17% of firms were at risk, these firms are typically smaller and accounted for much less of a share of overall corporate debt in the fourth quarter of 2021 (1.6%). This share of corporate debt accounted for by firms at risk is also noticeably smaller than it was earlier in the pandemic (3% in the fourth quarter of 2020).

Note: Interest coverage ratio is defined as earnings before interest, taxes, depreciation and amortization divided by interest expense. Current ratio is defined as a firm’s current assets divided by its current liabilities.
Sources: FactSet and Bank of Canada calculationsLast observation: 2021Q3

The direct impact of higher interest rates on the financing costs of most publicly listed firms will likely be small but could be problematic if higher rates are accompanied by a shock to firms’ revenues.24 Bonds accounted for the largest share of the outstanding debt of listed businesses as of the third quarter of 2021. Firms issued most of these bonds at fixed rates, and the bonds are not set to mature for at least five years (Chart 12). This means that only a small share of the bonds will be affected by changes in interest rates over the next few years.

Some of the bonds set to roll over in coming years were issued at a higher rate than the refinancing rate. This suggests that increases to interest rates from their historic lows could have a limited impact on the refinancing costs of existing corporate debt. The issuance of new debt, however, would become more costly than it was in previous years.

Sources: FactSet and Bank of Canada calculationsLast observation: 2021Q3

Over the past year, some businesses have relied less on high-yield debt markets (Vulnerability 3). The Bank previously raised a concern that some businesses in need of financing would issue high-yield corporate bonds or secure leveraged loans.25 Firms that rely on these riskier debt markets may be vulnerable to a sudden change in investor sentiment. A shift in the risk appetite of investors could lead to a sharp repricing of existing assets (see “A further global repricing of risk”). It would then become both more expensive and more difficult to roll over existing debt and issue new high-yield bonds.

So far in 2022, Canadian businesses have issued high-yield bonds at a slower pace than that of the previous two years, when many firms increased their issuance to take advantage of favourable financing conditions (Chart 13). This may be due to increased funding costs as high-yield spreads have widened, reflecting a decreasing risk appetite for investors. These investors may also be shifting to safer fixed-income assets following broad increases in bond yields. Additionally, heightened uncertainty since Russia’s invasion of Ukraine may cause firms to hesitate to issue high-yield debt. Higher volatility could be particularly important in the oil and gas sector, which typically accounts for a sizable share of this debt.

Note: Values for 2022 are based on observed levels of issuance until June 7 and annualized for the remainder of the year.
Sources: Bloomberg Finance L.P. and Bank of Canada calculationsLast observation: June 7, 2022

Recent analysis suggests businesses that issue high-yield bonds have more diversified sources of financing than previously thought. New firm-level data provide a better understanding of how much firms rely on high-yield debt markets relative to other funding sources (Box 3). This evidence suggests that disruptions to high-yield debt markets would have less impact on the Canadian economy than previously assumed because most businesses that use such debt can draw on other funding sources if needed.

Box 3: A deeper look at Canadian firms relying on high-yield debt markets

Box 3: A deeper look at Canadian firms relying on high-yield debt markets

Bank staff have created a new firm-level dataset to shed light on publicly listed Canadian firms that use high-yield bonds to finance their operations.26 Previously, the Bank identified the reliance of some businesses on high-yield debt markets as a macrofinancial vulnerability to the Canadian economy. The thinking was that if lower-rated firms rely on these riskier and costlier forms of financing, it must be because they have few other financing options. The new dataset tests this theory. The results suggest these firms do not pose a significant risk to the Canadian economy.

The new dataset connects three sets of firm-level data:

  • granular information on bonds and loans of publicly listed firms from data provider FactSet in its Debt Capital Structure DataFeed
  • the credit rating of each bond from financial data firm Refinitiv
  • financial statements from FactSet’s Fundamentals database

An analysis of this dataset reveals three key findings:

  • These firms have access to additional sources of funding besides high-yield debt (Chart 3-A). For instance, the firms meet more than one-third of their financing needs by using their retained earnings and by issuing equity shares. They also use bank loans and lines of credit. After several years of increases, the funding share of high-yield bonds stabilized in 2021.

Sources: FactSet, Refinitiv and Bank of Canada calculationsLast observation: 2021Q4

  • Most outstanding high-yield bonds will not mature for at least four years (Chart 3-B). That means most firms using these bonds would not immediately suffer should markets be disrupted or freeze entirely. Over 90% of these firms had some room to borrow more on their lines of credit as of the fourth quarter of 2021. Many also stockpiled a large amount of liquid assets. If the high-yield bond market and other funding sources were to freeze and these firms did not earn any income, about 75% of them could use their current liquid assets to pay off debt obligations coming due over the next year.

Sources: FactSet, Refinitiv and Bank of Canada calculations

  • Firms relying on high-yield bonds account for a small share of total business investment. In FactSet’s Fundamentals database, this share is 10%. But this proportion is likely much smaller because the database has information on only a fraction of all firms in Canada. This means firms that use high-yield debt do not appear to pose a systemic risk to macrofinancial stability.

The three findings in this analysis suggest that any disruptions to the high-yield bond markets would not have broad impacts on the Canadian financial system and economy.

Financial system

Fixed-income market liquidity

  • Fragile liquidity in fixed-income markets (Vulnerability 4) is a structural vulnerability that stems largely from considerable growth in the asset management sector over the past two decades. This growth has increased the likelihood that a sudden spike in the demand for liquidity could exceed the supply. When many asset managers and other financial market participants try to sell assets at the same time, bank-owned dealers may be unwilling to fully absorb these assets on their balance sheets. As a result, some fixed-income markets could freeze, and financial market participants could be forced to sell assets at significantly reduced prices.
  • This vulnerability has not changed significantly over the past year. While the asset management sector grew robustly, growth was more modest in the subsectors that are most likely to suddenly demand liquidity, such as fixed-income investment funds. As well, investment funds are holding a greater share of their portfolios in cash. At the same time, the willingness of bank-owned dealers to supply liquidity may be somewhat more constrained by quantitative tightening (Box 4) and by uncertainty around inflation and Russia’s invasion of Ukraine.

Fixed-income markets remain vulnerable to a sudden spike in demand for liquidity (Vulnerability 4). This structural vulnerability has developed in part because the asset management sector—which includes investment funds, pension funds and insurance companies—has grown from $2.3 trillion in assets under management in 2008 to $7.1 trillion in 2021. Over this period, some asset managers have shifted their portfolios to riskier, less-liquid assets. For instance, mutual funds have increased their allocations to corporate bonds from more-liquid government bonds, including those with a lower quality of credit.27 To meet the claims of their investors or counterparties, asset managers may have to sell fixed-income assets to generate cash. While bank-owned dealers act as the primary intermediaries of fixed-income markets, this role is reinforced under normal conditions by the willingness of asset managers and other financial market participants to both buy and sell fixed-income assets. In a crisis, if many asset managers try to generate cash by selling fixed-income assets, and other financial market participants are unwilling to buy these assets, it may fall upon bank-owned dealers to buy these assets and hold them on their balance sheets. Market functioning could be severely impaired if these dealers are unwilling to buy these assets if, for example, the riskiness of these assets increases or dealers approach internal risk limits. This happened in March 2020, causing some fixed-income markets to freeze and making it harder for firms to generate cash.28

Developments in the asset management sector over the past year have not substantially affected potential demand for liquidity. While the asset management sector grew by 12.6% in 2021, a smaller group of entities that may engage in a significant amount of maturity transformation, credit transformation and liquidity transformation grew by only 4.1%.29 Moreover, the increase in the growth in fixed-income investment funds was mitigated because the share of cash held by investment funds grew over the past year. A subset of fixed-income funds that hold lower-rated, relatively illiquid bonds—making them most likely to rely on cash buffers in a crisis—was the main factor behind this growth.

The willingness of banks to supply liquidity to fixed-income markets may have further decreased. In recent months, volatility in fixed-income markets has increased and market liquidity has declined. As well, ongoing quantitative tightening may reduce excess liquidity in the banking system and place downward pressure on banks’ liquidity coverage ratios (Box 4). As banks approach their internal limits for their liquidity coverage ratios and seek to rebuild their liquidity, their dealers’ capacity to support fixed-income market making may be negatively affected.30

Box 4: Central bank balance sheets and the banking system

Box 4: Central bank balance sheets and the banking system

The Bank of Canada launched the Government of Canada (GoC) bond purchase program in April 2020 initially to help restore market functioning and later to stimulate economic activity. Known as quantitative easing (QE), the program helped lower borrowing costs for households, businesses and governments by putting downward pressure on long-term interest rates. This program removed one type of high-quality liquid asset (HQLA) from the financial system—GoC bonds—and replaced it with another—settlement balances held at the Bank of Canada. As a result, the total amount of HQLAs in the system remained the same.

Bond purchases changed the composition and distribution of HQLAs among participants in the financial system. Most of the bonds purchased through QE came from outside the banking sector, including households, businesses, foreign entities and non-bank financial institutions. Through these purchases, these participants exchanged their GoC bonds for deposits at large commercial banks. The banks, in turn, deposited these funds with the Bank of Canada. QE expanded the overall size of the balance sheet of the banking sector: liabilities grew by the amount of net new deposits, and assets grew as that money was redeposited at the Bank as settlement balances.

As a result of QE, the liquidity coverage ratios (LCRs) of major Canadian banks surged.31 This was because the banking sector received a large injection of HQLAs from settlement balances in a short period (Chart 4-A). Over time, the banking sector adjusted and the total LCR returned to levels similar to those seen before QE. Banks reduced their holdings of HQLAs, other than settlement balances, and increased their holdings of riskier assets, including commercial loans and mortgages.

Note: The liquidity coverage ratio is defined as the ratio of high-quality liquid assets to total net cash outflows over the next 30 calendar days. Canada’s Big Six banks are federally regulated financial institutions that have been designated as systemically important to the Canadian financial system by the Office of the Superintendent of Financial Institutions. They are the Royal Bank of Canada, Toronto Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada.
Sources: Big Six banks’ public quarterly financial statementsLast observation: 2022Q2

In April 2022, the Bank officially started the process of reducing its holdings of maturing GoC bonds, a process known as quantitative tightening (QT). Because the Bank has stopped buying GoC bonds, bond prices are expected to decline and put upward pressure on long-term interest rates. Higher yields should encourage other participants, such as commercial banks, households, businesses and investment funds, to hold more GoC bonds. If these non-bank sector participants make new bond purchases, they would draw down their deposits at commercial banks to do so. Under such a scenario, and all else being equal, the liabilities of the banking system would shrink as these deposits are withdrawn, but this would be accompanied by a simultaneous and equal reduction in assets.32 Without countervailing actions by the banks to offset the QT-driven declines in balance sheets, QT would reduce the total size of the banking system’s balance sheet and put downward pressure on LCRs.

In practice, the impact of QT on the banking system will depend on how banks react to the downward pressures on their balance sheets. For instance, they could decide to counteract these forces by:

  • Purchasing some of the newly issued GoC bonds. They would simply exchange settlement balances for GoC bonds. This would not affect the structure of their liabilities or the overall size of their balance sheets. However, banks would have to compete with one another and with non-bank financial institutions to purchase these assets.
  • Raising new funding through additional liabilities, such as term funding. Any incremental funding would have to be primarily invested in HQLAs to ensure the LCR returns to its desired level.

More generally, QT is expected to increase the cost of credit by putting upward pressure on interest rates at maturities where households and businesses typically borrow.

Cyber security

  • Russia’s invasion of Ukraine has increased the level of concern around cyber security. Cyber threats (Vulnerability 5) represent a structural vulnerability that stems from the interconnectedness of the financial system—a cyber attack on one part of the system can quickly spread to other parts and threaten financial stability. The greater frequency and sophistication of state-sponsored attacks in the context of the ongoing war in Ukraine have increased the risk that a successful cyber attack could have consequences across the financial system. Against this backdrop, financial institutions and authorities continue to invest in improvements to their cyber resilience.

Cyber threats (Vulnerability 5) are a significant structural vulnerability, given the highly interconnected nature of the financial system. A successful cyber attack on a major financial institution, financial market infrastructure or other critical infrastructure (such as power grids or telecommunications systems) could cause system-wide disruptions. It could also have high financial and reputational costs as well as significant consequences for the smooth and continuous delivery of financial services. For instance, households and firms could temporarily lose:

  • access to their funds
  • the ability to make electronic payments

Ultimately, public trust in the financial system rests on the ability of participants to protect the day-to-day functioning of the system. This means ensuring resilient operations, which includes preserving the integrity of personal and financial data.

Russia’s invasion of Ukraine has increased the risk of a cyber attack with effects across the entire financial system. While ransomware—the most common cyber threat—could have consequences for the entire system, it has been used mainly to extort money. In contrast, cyber attacks performed in the context of a geopolitical military conflict, which could include targeting a country’s financial system, are purposely designed to inflict the most damage. In recent months, Russia has carried out many cyber attacks on Ukraine in addition to its military offensive. The greater frequency and sophistication of state-sponsored cyber attacks raise the risk that a successful attack in Canada could significantly disrupt the Canadian financial system (see “A cyber attack that has systemic consequences”).33

Financial system participants remain concerned about potential cyber incidents. As in previous years, many of the respondents to the Bank of Canada’s spring 2022 Financial System Survey identified cyber incidents as one of the top three risks for their organizations (Chart 14).34

Note: There was no Financial System Survey in spring 2020 due to the COVID‑19 pandemic.
Source: Bank of CanadaLast observation: spring 2022

Financial institutions and authorities continue to invest in improvements to their cyber resilience. The financial industry remains at the leading edge of cyber risk management practices.35 Financial institutions have invested in further improving their security controls and contingency plans, including third-party risk management practices, in light of the most recent state-sponsored and other cyber attacks observed around the world. These and other investments by individual businesses are crucial, but sector-wide action is also needed to address broader implications of a successful cyber incident. The Bank has therefore been actively involved in enhancing collaboration and information sharing across the financial sector. See “Cyber threats” for information on what the Bank is doing to improve the financial system’s resilience to cyber threats.

Climate change considerations

  • The risk associated with climate change primarily reflects the high level of uncertainty associated with the transition to a low-carbon global economy. The wide range of possible paths for this transition creates the potential for the quick repricing of assets exposed to climate-related risks, which could lead to stranded assets. Russia’s invasion of Ukraine has increased this uncertainty.
  • This risk is amplified by the fact that pricing may not properly reflect hard-to-assess economic and financial risk factors associated with the impacts of climate change (Vulnerability 6). Better disclosure of climate exposures by businesses and financial institutions—along with a clear, detailed and credible transition path by global policy-makers—can facilitate the assessment of risks and the adequate pricing of assets. Both internationally and domestically, initiatives are underway to establish a more standardized and systematic approach to the disclosure of exposures to climate-related risks.
  • In the short term, ongoing geopolitical conflicts are threatening global energy security, increasing the dependence on more-polluting fossil fuels (such as coal in Europe) and raising the risk of a delay in necessary transition plans. Over the medium term, the situation is more uncertain. The current high level of energy prices could boost investments in carbon-intensive sectors in the short term, resulting in additional assets being stranded in the future. Conversely, Russia’s invasion of Ukraine could help strengthen momentum toward achieving energy independence by speeding up investments in renewable sources of energy.

The vulnerability associated with climate change stems from the likelihood that the pricing of assets exposed to either physical or transition climate risks does not fully reflect the hard-to-measure future economic risk factors due to climate change (Vulnerability 6). For financial instruments to be appropriately priced, market participants need access to reliable information on firms’ and financial institutions’ exposure to climate-related risks and on their transition plans. The current level of disclosure is not enough to properly assess these risks.

Over the past year, momentum toward a more standardized and systematic approach to the disclosure of exposures to climate-related risks has been building. Investors are increasingly demanding consistent, comparable and useful climate-related information. As a result, several initiatives have emerged to standardize the way firms report their exposures to climate risks. More importantly, standards for disclosure appear to be converging globally.

  • Standardization of disclosures to climate risks: The following organizations have recently proposed requirements related to firms’ disclosure of exposures to climate risks:
    • the International Sustainability Standards Board (ISSB)36
    • the US Securities and Exchange Commission (SEC)37
    • the Canadian Securities Administrators (CSA)38
    The rules proposed by the CSA are less prescriptive than the ISSB and SEC standards but, like those standards, are based on the four pillars of recommended disclosures created by the Task Force on Climate-Related Financial Disclosures but are less prescriptive.39 If the finalized Canadian standards for disclosure of climate risks are not largely consistent and comparable with emerging global standards, Canadian businesses may not be able to attract enough capital to facilitate the transition to a low-carbon economy. It is therefore important for disclosure standards in Canada to be aligned with those adopted internationally.
  • Systematic disclosure: Before the COP26 climate conference held in November 2021, Canada’s Big Six banks joined the Net-Zero Banking Alliance.40, 41 This alliance requires members to, among other things:
    • annually publish information on their greenhouse gas emissions
    • regularly disclose progress against a board-reviewed strategy for decarbonizing their activities and assets by 2050
    Moreover, the Canadian government announced in its 2022 budget that the Office of the Superintendent of Financial Institutions will require federally regulated financial institutions to disclose their climate exposures starting in 2024.42 The Bank will begin to report its climate-related financial risks starting in fiscal year 2022.

Despite these developments, the financial sector remains in the early stages of building its capacity to assess risks related to climate change. See “Climate-related risks” for information on what the Bank is doing to help this sector improve its understanding, measurement and disclosure of climate-related risks.

The difficulty in assessing the value of assets exposed to climate change may also reflect jurisdictions’ lack of a clear, detailed and credible economic policy path to achieve net-zero emissions by 2050. In addition to long-term objectives for greenhouse gas emissions, a timely and clear roadmap by global policy-makers for achieving those objectives has the most potential to lower the likelihood of a sharp correction in asset prices. Delayed action would need to be more aggressive in the future to achieve the same goal, making a sudden repricing of carbon-intensive assets more likely and leaving investors exposed to sudden financial losses. Mispricing can defer investments needed to achieve such a transition.

In the near term, current geopolitical conflicts are likely increasing the risk of a disorderly repricing of assets. Russia’s invasion of Ukraine has placed the importance of energy security at the forefront of global policy-making and has served as a reminder that the global economy remains highly dependent on fossil fuels. An embargo against Russian exports of energy commodities would stimulate the exploitation of alternative—and possibly more-polluting—sources of fossil fuels (such as coal) in the short term. And with global prices of energy commodities now substantially higher than they were before the invasion of Ukraine, valuations of carbon-intensive assets appear farther away from where they will need to be in a future low-carbon economy. This short-term increase in prices could promote investments in carbon-intensive sectors in some jurisdictions, which could lead to a larger economic impact, including stranded assets, as the world shifts to cleaner forms of energy.

The long-term impact of current geopolitical conflicts is more uncertain. In response to current conflicts, some countries may seek to accelerate their energy transition plans through greater investments in renewable sources of energy. The desire for energy security could also boost the credibility of existing transition plans, helping reduce market mispricing. Moreover, elevated prices for fossil fuels will encourage consumers and businesses to transition away from this form of energy more quickly.

The Bank will continue to monitor these developments and analyze their implications for climate-related risks and the future of the Canadian economy and financial system.


  • Cryptoasset markets are growing rapidly, and their expansion has outpaced global efforts to regulate them. Risk is therefore rising, although the Bank assesses that it has not yet become systemic. Investors in cryptoassets do not benefit from the same levels of protection offered for other classes of assets. Considerable swings in prices make these assets inadequate as a method of payment; consequently, they remain primarily a speculative investment. Cryptoassets are, however, becoming more integrated into the traditional financial system, increasing the risk that shocks to these markets could affect the broader financial system. The number of holders of cryptoassets is also growing rapidly in Canada. However, holders of cryptoassets generally underappreciate the risks associated with them.
  • Stablecoins have emerged as a potential solution to price volatility in the cryptoasset market (Box 5). They should be less volatile than other cryptoassets because their value is pegged to a national currency in most cases and partially or fully backed by liquid assets in many cases. But the lack of transparency and leverage associated with some of them can lead to disorderly runs when investors start doubting their ability to redeem their funds. This was recently demonstrated by the sudden collapse of some stablecoins. A run on a stablecoin can quickly spread through cryptoasset markets more broadly given the central role this type of backed cryptoasset plays as a method of payment in both crypto trading platforms and decentralized finance. Federal and provincial authorities are moving to develop an integrated regulatory framework for stablecoins, but this remains work in progress.

Cryptoasset markets remain small on a global scale but have grown rapidly in recent years. The market capitalization of cryptoassets (including stablecoins) rose from about US$200 billion at the start of 2020 to a peak of close to US$3 trillion in November 2021 (Chart 15). With the sharp drop in cryptoasset prices in recent months, market capitalization declined to near US$1.2 trillion in early June 2022.43 Expressed on a global scale, these numbers remain relatively small. For instance, according to the Financial Stability Board (FSB), the market capitalization of cryptoassets equalled only 1% of global financial assets at its peak in November 2021.44

Source: CoinMarketCapLast observation: June 7, 2022

Ownership of cryptoassets is also broadening, primarily as a speculative investment rather than a method of payment. In 2021, about 13% of Canadians owned Bitcoin, up from 5% in 2020.45 The median holding of Bitcoin was about $500, mostly for investment purposes. To date, the significant volatility in the prices of these unbacked cryptoassets as well as high transaction costs have been key obstacles to their wide acceptance by merchants as a method of payment. For example, prices of cryptoassets such as Bitcoin and Ether were generally four to five times more volatile throughout 2021 than the S&P 500 stock market index was. Sudden price corrections mean that investors who hold these types of cryptoassets can be exposed to significant financial losses.

Interconnections between unbacked cryptoasset markets and the financial system appear limited but are expanding rapidly. Institutional participation in these markets has grown in recent years. However, estimating the growth of institutional investments in these assets and related infrastructure is difficult due to the lack of readily available and consistent data on the exposures of financial system participants to these markets. Discussions with industry participants suggest that portfolio exposures remain small. Cryptoassets have generally become more accessible to investors in recent years through the emergence of closed-end funds, crypto exchange-traded funds and listed companies dealing in or mining cryptoassets. Moreover, hedge funds and some large pension funds are reportedly investing more in cryptoasset platforms. Cryptoassets are also becoming more integrated into the traditional financial system (often referred to as the financialization of cryptoassets), including through the development of crypto derivatives markets and as investment assets or collateral for loans.

The Bank’s assessment that these markets are not yet of systemic importance is reinforced by the fact that the major sell-off in cryptoasset markets in May 2022 was broadly inconsequential for the traditional financial system in Canada and abroad.

Stablecoins aim to meet the demand for a more liquid and less volatile cryptoasset. Stablecoins play a key role in decentralized finance, a suite of alternative financial products offered in cryptoasset markets that mimic traditional financial services (e.g., loans, insurance, asset management and custody). Like other cryptoassets, stablecoins can also pose risks to financial stability if adopted on a significant scale without appropriate regulatory safeguards, particularly regarding the ability of issuers to respect redemptions (Box 5).

The lack of adequate regulatory frameworks for cryptoassets is a key factor behind this vulnerability. Firms operating in cryptoasset markets often perform functions similar to those of traditional financial institutions. They share many risks but are not subject to the same regulatory standards. Until this regulatory gap is addressed, investors in and end users of unbacked cryptoassets are subject to heightened risk of financial losses from events such as fraud, cyber attacks or the failure of a key custodian or service provider. Moreover, a significant challenge to the regulation of cryptoassets is that they are easily used for transactions across borders. This can be positive for economic activities such as remittances, but it creates opportunities for illegal transactions such as money laundering and terrorist financing.46 For the regulation of these markets to be effective, countries will have to coordinate closely to ensure consistency and prevent criminals from exploiting regulatory gaps.

The regulatory response is taking form but needs to gather momentum. Regulators globally have recognized the risks posed by deficient regulatory frameworks and are working to address them. For instance, in March 2022 the US administration released an expansive executive order:

  • launching a strategy on digital assets
  • requesting many federal government agencies to jointly examine the regulation of digital assets47

In Canada, provincial securities administrators have issued guidance for the regulation of cryptoassets and cryptoasset trading platforms that meet the definition of securities or securities market infrastructure, respectively. The federal government announced in its 2022 budget that it would conduct a legislative review of the financial sector. The first phase of this review will focus on digital currencies, including cryptoassets and stablecoins.48 As part of that work, the government will examine:

  • regulatory approaches to maintaining the security and stability of the financial system as digital currencies become more common
  • the potential need for a central bank digital currency in Canada

In addition, a Bank of Canada official currently chairs the FSB Regulatory Issues of Stablecoins working group that is collaborating to promote globally coordinated regulatory responses to stablecoins.

More generally, federal and provincial authorities should move quickly to develop an integrated regulatory regime for cryptoassets, otherwise this vulnerability could continue to worsen.

Box 5: Stablecoins and their risks to financial stability

Box 5: Stablecoins and their risks to financial stability

Stablecoins aim to meet the demand for a liquid and less volatile cryptoasset. Large daily fluctuations in the price of cryptoassets make it difficult for them to serve as a store of value, a means of exchange or a unit of account—the traditional roles of money. Some issuers of cryptoassets have tried to resolve this problem by pegging the value of their cryptoasset to a reference asset—typically the US dollar.49

Like the market for unbacked cryptoassets, the market for stablecoins has grown rapidly over the past two years. The global market capitalization of stablecoins increased from about US$5 billion at the start of 2020 to close to US$160 billion in early June 2022 (Chart 15). Stablecoins act mainly as a bridge between:

  • different cryptoassets
  • traditional currencies and cryptoassets

In fact, over 65% of current cryptoasset trades involve stablecoins. Stablecoins also serve as important collateral in crypto derivatives markets and in decentralized finance—peer-to-peer financial services that use cryptoassets.

Stablecoins often provide the illusion of stability. Holders of many stablecoins are led to believe that they can be fully converted to currency on demand because they are backed by assets. But various stablecoins do not always adhere to the premise of a one-for-one backing with liquid assets. Sometimes, they are not fully backed by reserve assets, or the assets held are illiquid. Generally, there can also be a lack of clarity about how stablecoins can be redeemed for currency and the legal details behind this process.

A loss of confidence in the ability to redeem stablecoins could create a “disorderly run,” where large redemptions cause reserve assets to be sold at a reduced price, also known as fire sales. This could, in turn, lead to further redemptions. A disorderly run could spread to other stablecoins, cryptoasset markets and the broader financial system. The recent collapse in the value of TerraUSD, a stablecoin that uses an algorithm to adjust its supply so its value stays steady, provides a prime example of how the lack of transparency and trust about the way stablecoins peg their value makes them vulnerable to investor runs.

The underlying infrastructure behind stablecoins poses risks. This digital infrastructure faces many of the same risks as existing financial market infrastructures. In particular, they are subject to liquidity, credit, operational, cyber, settlement and governance risks. If not managed properly, or without adequate regulation, these risks could undermine the trust of participants and expose them to losses. If stablecoins become more commonly used as a method of payment, these risks could disrupt economic activity more broadly and have system-wide implications.

Given these risks, the regulatory response must gather momentum. Authorities around the world are mobilizing to address significant gaps in regulatory frameworks. In this context, the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions have published draft guidance on how international standards for payment systems apply to global stablecoin arrangements.50 The Financial Stability Board is working to update its recommendations for regulating global stablecoin arrangements. In Canada, the legislative review of the financial sector announced in the 2022 federal budget will initially focus on digital currencies, including stablecoins.

The Bank of Canada is working with relevant Canadian authorities—including other federal financial sector agencies and provincial securities regulators—and international partners to ensure there is global alignment on standards and best practices for regulating stablecoins. The aim is to develop an approach for stablecoin arrangements that will safeguard:

  • consumers
  • the integrity of the financial system
  • national security

Risks and resilience

Analysis of banking system resilience

  • The resilience of Canadian banks is key to preserving the stability of the financial system. Stress testing of major banks in Canada confirms that even if they faced a large and persistent economic shock, they would likely continue lending to the economy. Therefore, vulnerabilities highlighted in this report are primarily macrofinancial in nature. This means that the repercussions of a shock would adversely affect the real economy through financial linkages, even if the banking system remained solvent.

Bank staff conducted a stress-testing exercise to evaluate the resilience of the banking sector to a large and persistent economic shock.51 They employed a hypothetical risk scenario that entailed a severe and prolonged recession (a 5.8% decline in GDP lasting six quarters) to test the capital positions of domestic systemically important banks in Canada. They assumed no remedial fiscal and monetary policy measures, so the recession had a long-lasting negative impact on the Canadian economy.

In the risk scenario, banks incur significant financial losses but nevertheless remain resilient. The impacts on bank capital are sizable, with banks breaching the capital conservation buffer requirement of 8% during the first two years (Chart 16). The total common equity Tier 1 capital ratio declines rapidly from 12.3% to 7.4% in the first year before recovering to 8.3% by the end of the scenario.52 Although the decline in their capital ratios is sizable, banks are viewed as remaining broadly resilient because the capital ratios remain above the regulatory minimum of 4.5%. They therefore continue lending throughout this scenario and thus contribute to economic activity. Their resilience is supported by solid capital positions, a robust capacity to generate revenues even in times of stress and sound underwriting practices.

* The yellow horizontal line reflects the domestic stability buffer level that was effective in 2020Q4.
† The capital conservation buffer includes an additional 1% surcharge for domestic systematically important banks.
Source: Bank of Canada calculationsLast data plotted: 2023Q4

Market participants’ confidence in the resilience of the Canadian financial system has reached the highest level reported (Chart 17).53 The Bank’s most recent Financial System Survey revealed that all respondents are confident the Canadian financial system could withstand a large shock. Reasons cited for this high confidence were:

  • the well-capitalized banking sector
  • the well-regulated financial system
  • the pandemic response from fiscal and monetary policy authorities

Note: Results are in response to the Financial System Survey question: “How confident are you in the Canadian financial system’s ability to withstand a large shock?” Confidence index weights: not at all confident: 0 points; not very confident: 1 point; fairly confident: 2 points; very confident: 3 points; completely confident: 4 points. There was no Financial System Survey in spring 2020 due to the COVID‑19 pandemic.
Source: Bank of CanadaLast observation: spring 2022

Risks and financial stability

A large decline in household income and house prices

  • This risk has increased over the past year but continues to be macrofinancial in nature, meaning there would be negative spillovers to both the macroeconomy and the financial system. House prices have risen further, and the health of the balance sheets of households is more tied to the value of their home. An increasing share of households have taken out mortgages that are large relative to their incomes, making them more vulnerable to rising interest rates. The likelihood of a shock that reduces real income has also increased.

A shock leading to lower household income—such as a global recession—would significantly reduce the ability of households to service their debts. A sizable decline in house prices could reinforce this effect. As explained in the 2021 Financial System Review, such an event would have an amplified effect on the macroeconomy given the two vulnerabilities identified in this report—the elevated level of household indebtedness and elevated house prices.

For instance, if debt payments take up a large portion of its income, a household facing a job loss could have difficulty servicing its debt without significantly reducing consumption. In addition, if the shock were to cause house prices to drop considerably, reduced equity would further restrain the ability of some households to use secured sources of borrowing, such as home equity lines of credit or mortgage refinancing. Households with limited liquid assets may be forced to liquidate assets or reduce their spending, or both. If the shock is large enough to cause many households to be in this situation, the size of the impact could create a negative feedback loop between the real economy and the financial system.

The likelihood of this risk materializing and its impact on the economy are greater today than in the past for a few reasons:

  • Housing represents a greater share of a household’s assets than in previous decades. This means that household net worth is now more sensitive to movements in house prices.
  • With more highly indebted households, an increase in unemployment would lead to more occurrences of financial stress among households.
  • High debt levels have made debt service ratios much more sensitive to rising mortgage rates, making indebted households possibly more vulnerable at renewal time.

A further global repricing of risk

  • This risk has also increased over the past year. Global financial markets have already experienced a correction. Nevertheless, the risk of a further, disorderly repricing of risk remains. Geopolitical tensions are running high, and the associated economic uncertainty is affecting risk appetite. In addition, major central banks are entering a phase of monetary policy tightening that could interact with existing vulnerabilities.

A global repricing of risk could lead to much tighter financial conditions around the world and in Canada, which would reduce private domestic demand. This risk was discussed at length in the 2021 Financial System Review. A shock causing a significant change in market sentiment could lead to a large drop in the value of financial assets, implying lower net worth for households and firms and lower residential and business investment. If the change in market sentiment were to lead to a sudden increase in demand for safe assets, market functioning could be impaired, given the noted vulnerability of market liquidity to spikes in demand.

In the event of a sudden repricing of risk, financial or commodity-trading firms that are highly leveraged may be unable to meet margin calls or interest payments. Through the use of derivatives and prime brokerage arrangements with multiple lenders, these firms may build highly leveraged positions that their counterparties and regulators are unaware of, as was the case with Archegos Capital Management.54 Left unchecked, positions built up through “hidden leverage” may become large enough to harm financial stability, especially if they are paired with lenders’ concentrated credit exposure to highly leveraged firms. The FSB has identified this issue as a growing concern, and the Bank of Canada is currently participating in FSB initiatives to understand hidden leverage in the global financial system.55

A cyber attack that has systemic consequences

  • Recent global geopolitical conflicts have heightened this risk. The greater frequency and sophistication of state-sponsored cyber attacks in the context of Russia’s invasion of Ukraine increase the risks that a successful attack could significantly disrupt the Canadian financial system.

A successful cyber attack that harms critical participants in the financial system could threaten Canada’s financial stability (Figure 2). Attacks perpetrated on a systemically important financial institution, such as a major bank, or a systemic financial market infrastructure (FMI), such as a major payment system or clearing and settlement system, can have cascading effects. Alternatively, targeted attacks on critical infrastructure—such as the electricity grid or providers of telecommunications, cloud or critical services—could disrupt operations in multiple sectors, including the financial sector.

Figure 2: Transmission channels of a cyber attack that has systemic consequences

Trigger event Vulnerability Cyber threats in an interconnectedfinancial system A successful cyber attack on a financial institution, a financial market infrastructure (FMI) or critical infrastructure (including public infrastructure or third-party service providers) Compromised provision of services at one systemically important financial institution or FMI Financial institutions or FMIs are operationally, technologically and financially connected to other participants in the financial system The use of third-party service providers is concentrated Compromised provision of services at other participants in the financial system Financial losses Loss ofconfidence Loss ofprivacy Loss of dataintegrity Operational and financial loss feedback
Description: Transmission channels of a cyber attack that has systemic consequences

Figure 2 is a flow chart showing the transmission channels of a cyber attack that has systemic consequences.

First, a trigger event occurs. For example, the event could be a successful cyber attack on a financial institution, a financial market infrastructure, also known as an FMI, or other critical infrastructure, which includes public infrastructure and third-party service providers.

As a result of this event, one systemically important financial institution or FMI becomes unable to provide services.

Cyber threats in an interconnected financial system increase the effects of this vulnerability. This vulnerability occurs when financial institutions or FMIs are operationally, technologically and financially connected to other participants in the financial system or when many of the participants use the same service providers. Through these connections, other systemically important financial institutions or FMIs that are linked to the institution affected by the initial attack may also become compromised. Each time a new institution is compromised, any institutions connected to it become at risk of being compromised as well, including the institution that was initially attacked.

If a financial institution or FMI is compromised, it could have detrimental effects on that institution, its clients and the financial system as a whole. These effects can include financial losses, a loss of confidence, a loss of privacy and a loss of data integrity.

The systemic nature of this risk stems from the fact that participants in the financial system are highly interconnected—operationally, technologically and financially—and share important service providers. A successful cyber attack on a key financial institution, FMI or critical service provider could potentially affect financial stability through one or more of these connections. The attack could impair a financial institution’s provision of services to both its own clients and other financial institutions. For instance, a major bank needing to transfer a large amount of funds to other institutions may not be able to do so if a cyber attack causes its computer system to crash. In turn, other institutions relying on these funds for their operations may not be able to conduct critical business.56

A cyber attack could spread malware from a key financial institution to all other connected institutions, resulting in the potential loss of data integrity, system availability or data confidentiality. A cyber attack that leads to a large financial loss at the targeted financial institution could then result in further losses at other financial institutions. Under certain circumstances, a large part of the financial system may be affected. Such a scenario could reduce the confidence households and businesses place in the financial system, and preserving trust in the system is a key factor in maintaining financial stability. In an extreme situation, this scenario could even lead to runs on banks or funds and fire sales of assets.

Participants in the financial system remain vigilant and continue to invest significantly to maintain their overall resilience against cyber attacks. The sources of these attacks evolve, and cyber criminals develop new strategies that are more sophisticated and harder to detect. The greater frequency and sophistication of state-sponsored cyber attacks, especially the recent attacks by Russia on Ukraine, are of concern.57 The ongoing digitalization of the economy and financial services, while bringing benefits, creates more interconnections and entry points into computer systems for cyber criminals to exploit.

Market view of risks

The Bank solicits the views of financial system participants through its Financial System Survey. The survey results are a useful benchmark to compare Bank views and analytical work with outside opinions. The survey also provides information in areas where the Bank has limited data or insight, and it helps identify new topics for analysis.

Market participants believe that the likelihood of a shock with the potential to severely impair the functioning of the Canadian financial system has increased (Chart 18). This increase is greater in the short term, although the reported medium-term likelihood is slightly higher. For both horizons, market participants cited similar reasons, including increased geopolitical risks, the withdrawal of monetary policy support and higher inflation.

Note: Results are in response to the Financial System Survey question: “What is the likelihood that a large shock with the potential to severely impair the functioning of the Canadian financial system will occur in the short term and medium term?”
Source: Bank of CanadaLast observation: spring 2022

Safeguarding the financial system

  • The Bank of Canada collaborates closely with domestic and international partners, both private and public, to improve the resilience of the financial system.

Domestically, the Bank is actively involved with federal and provincial authorities on issues pertaining to the financial system. The Bank chairs the Heads of Regulatory Agencies Committee and its Systemic Risk Surveillance Committee (SRSC), two federal-provincial forums for cooperation on financial sector issues (Box 6). The SRSC’s work contributes directly to the Bank’s assessment of the financial system that is published in the annual Financial System Review. To achieve its financial system goals, the Bank also collaborates with federal, provincial and international authorities as well as industry through financial system committees. In particular, the Bank participates actively in the Senior Advisory Committee (SAC) and the Financial Institutions Supervisory Committee.

Internationally, the Bank contributes to discussions on financial system issues. Through many committees and working groups, the Bank regularly collaborates and shares information with other central banks, the International Monetary Fund, the World Bank, the FSB, G7 and G20 members and the Bank for International Settlements.

Box 6: Activities of the Heads of Regulatory Agencies Committee and the Systemic Risk Surveillance Committee over the past year

Box 6: Activities of the Heads of Regulatory Agencies Committee and the Systemic Risk Surveillance Committee over the past year

The Heads of Regulatory Agencies (HoA) Committee is an important federal-provincial forum for cooperation on financial sector issues. Chaired by the Bank of Canada, the HoA brings together the Department of Finance Canada, the Office of the Superintendent of Financial Institutions (OSFI), Quebec’s Autorité des marchés financiers, the Ontario Securities Commission, the British Columbia Securities Commission and the Alberta Securities Commission. Its Systemic Risk Surveillance Committee (SRSC) facilitates information sharing and collaboration on the assessment of vulnerabilities and risks to the Canadian financial system. This committee includes all agencies that participate in HoA as well as the Canada Mortgage and Housing Corporation (CMHC), the Canada Deposit Insurance Corporation, the BC Financial Services Authority (BCFSA) and the Financial Services Regulatory Authority of Ontario (FSRA).

Over the past year, the HoA and SRSC have discussed important financial system topics, including:

  • vulnerabilities associated with household indebtedness and the housing market, in particular the role of investors
  • market liquidity issues in fixed-income markets
  • operational risks and the cyber resilience of the financial system
  • the potential for mispricing of risk across certain asset classes
  • potential risks to financial stability from stablecoins and other cryptoassets
  • Canadian and international policy work on climate change and sustainable finance
  • impacts to the Canadian financial system from Russia’s invasion of Ukraine

SRSC subgroup on liquidity mismatch in open-ended investment funds

The Financial Stability Board (FSB) identified liquidity mismatch in open-ended funds as a key structural vulnerability of ongoing concern for financial market stability.58 Liquidity mismatch is the potential mismatch between the liquidity of fund investments and daily redemption of fund units. If investors redeem their assets during a crisis, open-ended funds could be forced to sell assets in illiquid markets to generate cash, which could aggravate fragile liquidity conditions (Vulnerability 4). The FSB and the International Organization of Securities Commissions are working together to review the effectiveness of their previous recommendations on liquidity mismatch.59 Mirroring this work, the SRSC wants to better understand how fund managers are managing liquidity mismatch in Canadian open-ended investment funds.

The Bank, along with provincial regulators in Ontario and Quebec, established an SRSC subgroup to further investigate this vulnerability. The subgroup seeks to deepen its understanding of the vulnerability by analyzing several factors:

  • the holdings of fixed-income open-ended mutual funds
  • the assumptions fund managers make about the liquidity of their assets under both stressed and normal conditions
  • redemption terms
  • tools at the disposal of fund managers to manage investor redemptions

SRSC subgroup on investor demand for housing

As discussed in Box 2, the strength in investor demand over the past year has likely contributed to strong growth in house prices. To better understand the vulnerabilities posed by real estate investors, the Bank established an SRSC subgroup. The following agencies are taking part: OSFI, CMHC, the Department of Finance Canada, FSRA and BCFSA. The subgroup shares intelligence and analysis on:

  • the characteristics of investors that can lead to a vulnerability for the economy and the financial system
  • the underwriting practices of financial institutions as they apply to investors
  • data gaps and avenues to fill these gaps

Household debt and elevated house prices

The Bank contributes to financial stability by helping to increase awareness of ongoing and emerging risks related to household finances and the housing market. Through the Financial System Review, the Financial System Hub and public speeches by members of Governing Council, the Bank shares pertinent research and analysis, drawing insights to help households, lenders and policy-makers better identify and mitigate risks. Through its membership on committees, the Bank also actively engages in dialogue and information sharing with various federal and provincial authorities.

In Budget 2022, the federal government announced measures to help reduce imbalances in the housing market. In particular, it proposed banning foreign investors for two years to increase the supply of homes for sale to domestic residents. As well, investments in affordable housing are designed to boost housing supply. These measures would better align housing supply and demand, which could help to moderate increases in house prices over the medium term.

More generally, federal authorities periodically review the need to adapt regulatory guidance and policies to make sure the risks to financial institutions and the financial system as a whole remain contained. For instance, in June 2021, the Office of the Superintendent of Financial Institutions (OSFI) and the Minister of Finance implemented a new minimum qualifying rate used in stress tests on uninsured and insured mortgages issued by federally regulated financial institutions.60 OSFI committed to reviewing the minimum qualifying rate at least annually, in December. It will also conduct a holistic assessment of Guideline B-20: Residential Mortgage Underwriting Practices and Procedures to ensure it remains clear and appropriate.61

Financial market functioning

Efforts at interest rate benchmark reform

Since 2013, work has been underway globally to address concerns about the reliability and robustness of major interest rate benchmarks—including the London Interbank Offered Rate (LIBOR). At the end of 2021, this work reached a major milestone with the discontinuation of all Japanese-yen, Swiss-franc, euro and British-pound LIBOR rates as well as some of the less used US-dollar LIBOR rates. Work continues to prepare financial markets for the discontinuation of the remaining US-dollar LIBOR rates after the end of June 2023.

In Canada, work on domestic benchmark reform has been led by the Canadian Alternative Reference Rate Working Group (CARR), a committee established by the Canadian Fixed-Income Forum in 2018. CARR brings together the Bank and 22 firms from across the Canadian financial system. In 2021, CARR began examining the efficacy of the Canadian Dollar Offered Rate (CDOR) to ensure Canada’s benchmark regime remains robust, relevant and effective. CDOR is a major interest rate benchmark in Canada; it underpins more than $20 trillion worth of derivatives, securities and loans and plays a key role in the market for bankers’ acceptances.

CARR’s work on reviewing CDOR culminated in December 2021 with the publication of a white paper recommending that CDOR’s administrator, Refinitiv Benchmark Solutions (UK) Ltd. (RBSL), cease the publication of CDOR after the end of June 2024.62 The recommendation included a two-stage transition plan to move from CDOR toward the Canadian Overnight Repo Rate Average (CORRA) as the primary interest rate benchmark in Canada. After a public consultation on CARR’s recommendation, RBSL announced on May 16, 2022, that it would cease the publication of CDOR after June 28, 2024.63 OSFI provided support for the implementation of CARR’s two-stage transition path by referencing CARR’s timelines in its supervisory expectations for federally regulated financial institutions and private pension plans.64

CARR will manage the transition until CDOR ends. This work includes:

  • developing and maintaining a roadmap that outlines steps and timelines needed for Canadian markets to transition from CDOR in a timely manner, including various “CORRA first” initiatives to support CORRA liquidity
  • determining whether a term CORRA rate is feasible and appropriate for Canada for certain loan products—and developing such a rate, if appropriate
  • identifying securities that reference CDOR and that would be affected by CDOR’s cessation, and identifying solutions for securities that will be difficult to move to a new reference rate
  • identifying any potential legal, accounting or taxation-related roadblocks to the transition away from CDOR

Other initiatives

The Bank has been working with the financial industry through the Government of Canada Market Functioning Steering Group to develop a framework for supporting the market functioning of Government of Canada securities in a low interest rate environment. This framework includes an industry-wide “fail fee” for failing to deliver Government of Canada securities for settlement. It also provides a complementary set of recommended industry best practices relating to those settlements. This steering group will conduct an industry-wide consultation on the fail fee later in 2022 before the Canadian Fixed-Income Forum makes a final decision on its implementation.

Through its role as Chair of the Canadian Foreign Exchange Committee, the Bank has also been working with industry to encourage all firms active in the foreign exchange (FX) market in Canada to adopt the FX Global Code to demonstrate their commitment to a well-functioning FX market.65 The code is a set of 55 principles of good practice to promote a robust, fair, liquid, open and appropriately transparent market. It was developed through a partnership between central banks and market participants from 20 jurisdictions around the world.

Cyber threats

The 2022‒24 Cyber Security Strategy is the foundation for the Bank’s work on cyber threats. The strategy focuses on three pillars:

  • integrating cyber resilience in all of the Bank’s own operations
  • collaborating with external partners to improve the resilience of the financial sector
  • providing clear cyber security guidance to inspire confidence in the financial system

The Bank has also been responding to the competitive market for cyber security staff by developing new strategies to identify and recruit talent as well as to retain and develop existing employees. Further, the Bank is playing a coordinating role within the financial sector to increase public-private partnerships aimed at enhancing cyber security talent management and development. This issue is important to the entire financial sector.

Domestically, many of the cyber security initiatives the Bank leads are taking place through the Canadian Financial Sector Resiliency Group (CFRG) and the Resilience of Wholesale Payments Systems (RWPS) initiative.

  • The CFRG is a forum of key private and public participants from the financial sector. It facilitates various initiatives to improve the financial sector’s operational resilience. These initiatives include conducting tabletop exercises and investigating the risks from interconnections with critical infrastructure in other sectors. In the event of an operational incident with potential systemic consequences, the CFRG helps coordinate the response of its participants.
  • The RWPS is a collaboration between the Bank, Canada’s six largest banks and Payments Canada to share information and enhance the cyber resilience of Canada’s wholesale payments systems.

Following Russia’s invasion of Ukraine and the corresponding increase in risks to cyber security in the financial sector, the Bank and its partners reinforced their cooperation and information sharing. The CFRG meets regularly, and members have worked diligently to re-examine contingency plans around cyber security. The group’s tabletop simulation exercises provide members with an opportunity to practise how they would communicate with each other to share information and coordinate their decisions if a major cyber incident occurred. The Bank has also participated in similar discussions and simulations with its G7 counterparts.

Over the past year, Canadian federal authorities have published new guidance on best practices around cyber resilience for some key participants in the financial system. In October 2021, the Bank introduced new Expectations for Cyber Resilience of Designated Financial Market Infrastructures. The Bank is using these expectations to assess the cyber resilience of designated FMIs. Similarly, OSFI is reviewing comments it received during public consultations on Draft Guideline B-13: Technology and Cyber Risk Management. The guideline will apply to all federally regulated financial institutions.

To help the financial sector assess and disclose its climate exposures, the Bank is developing scenario-based approaches. For consistency and comparability, financial institutions need a common understanding of how the Canadian economy will evolve under various pathways to reduce greenhouse gas emissions. The Bank is using its expertise in macroeconomic modelling to provide reference projection scenarios for the financial sector. Earlier this year, the Bank and OSFI published the results of a pilot project that used climate scenarios to assess transition risks.66 This project was an important first step toward gaining a better understanding of the potential exposure of the financial sector to climate transition risks. It also helped participants improve their ability to perform climate scenario analysis and adapt their risk management practices to climate change.

Building on the success of this initiative, the Bank continues to collaborate closely with OSFI and financial system participants to assess financial risks stemming from climate change. Notably, Bank staff are analyzing the exposure of the real estate sector and mortgage portfolios to flood risks. And they are improving the Bank’s capacity to assess the systemic nature of climate-related risks, including those related to the transition to a low-carbon economy. The Bank is also enhancing its framework for modelling the macroeconomic effects of the transition. This will inform future stress testing and scenario analysis.

The Bank is reviewing its market operations to better integrate climate change considerations.67 To support this review, the Bank will consult with financial market participants and other stakeholders in autumn 2022. This consultation is intended to obtain views on adjustments the Bank may consider introducing to its financial market operations to promote the resilience of the financial system.

Given the global nature of climate change, the Bank continues to be actively involved in the climate work of a variety of international bodies, including the G7, the G20 and the FSB. In particular, the Bank sits on the steering committee of the international Network of Central Banks and Supervisors for Greening the Financial System. Through this forum, the Bank uses its influence and expertise to promote a scenario-based approach to the disclosure of climate-related risks.

Innovations in Canada’s payment systems

Safe and robust payment systems are crucial to overall financial stability.68 They enable consumers, businesses and governments to safely and efficiently purchase goods and services, make financial investments and transfer funds.

The Bank continues to partner with Payments Canada and industry organizations to modernize Canada’s core payment systems, notably around two initiatives:

  • Lynx: At the end of August 2021, Payments Canada successfully launched Lynx, Canada’s new large-value payment system. Upon its launch, the Governor of the Bank of Canada designated Lynx as a systemically important payment system, including it under the Bank’s oversight.69 This new payment system is more resilient and cyber secure than its predecessor, the Large Value Transfer System.70 It also incorporates a more robust framework for financial risk management by settling payments in real time on a gross basis. A second release of Lynx is planned for late 2022 to introduce the ISO 20022 message standard, which will enable more data-rich payments.
  • Real-Time Rail: The new retail payment infrastructure will support instant payments for individuals and businesses. Its launch is targeted for the second half of 2023.

The Bank continues to prepare for its new role supervising retail payment service providers (PSPs).71 Retail payments is an area of the financial system experiencing rapid growth and innovation, and PSPs are evolving in the electronic payment ecosystem. In 2021, the Bank’s tool kit for promoting the resilience of the financial system expanded. Under the Retail Payment Activities Act, which received Royal Assent in June 2021, the Bank will be responsible for supervising PSPs. In this role, the Bank will build confidence in the safety and reliability of services provided by PSPs while protecting end users from specific risks. The Bank is currently supporting the Department of Finance Canada in developing the regulatory framework for the new retail payments regime.

This report includes data received up to June 7, 2022.

  1. 1. The Bank initiated quantitative tightening in April 2022, when it stopped buying Government of Canada bonds to replace maturing ones.[]
  2. 2. See International Monetary Fund, “Global Financial Stability Report: Shockwaves from the War in Ukraine Test the Financial System’s Resilience” (April 2022).[]
  3. 3. In the spring 2022 Financial System Survey, financial market participants responded to questions on the potential risks from monetary policy normalization. They discussed how tightening either too quickly or too slowly could adversely affect their organizations.[]
  4. 4. Delinquency rates were calculated using TransUnion data. To protect the privacy of Canadians, TransUnion did not provide any personal information to the Bank. The TransUnion dataset was anonymized, meaning it does not include information that identifies individual Canadians, such as names, social insurance numbers or addresses.[]
  5. 5. Microdata on household assets are available only with a lag (the last available observations are for 2019). Because of this, Bank staff estimated the change in the distribution of liquid assets among households. To do so, they used a new version of the Household Risk Assessment Model (HRAM) combined with high-frequency data, such as details on interest rates, asset returns and employment income from Statistics Canada’s Labour Force Survey. This updated version of the HRAM builds on the original by explicitly modelling household consumption, savings and mortgage repayment decisions and, using a variety of data, can estimate levels of household assets, debt and income in subsequent years. For information on the original HRAM, see B. Peterson and T. Roberts, “Household Risk Assessment Model,” Bank of Canada Technical Report No. 106 (September 2016); and J. Allen, T. Grieder, B. Peterson and T. Roberts, “The impact of macroprudential housing finance tools in Canada,” Journal of Financial Intermediation 42 (April 2020). For an approach similar to the new version of the HRAM, see J. MacGee, T. M. Pugh and K. See, “The heterogeneous effects of COVID‑19 on Canadian household consumption, debt and savings,” Canadian Journal of Economics 55 (S1) (February 2022).[]
  6. 6. Households that want to borrow funds using a home equity line of credit (HELOC) must have at least 35% equity in their house (i.e., the size of the HELOC must not exceed 65% of the value of their house). If households want to combine a HELOC with a mortgage or to refinance their existing mortgage, they must have at least 20% equity in their house (a maximum loan-to-value ratio of 80%).[]
  7. 7. Based on the two-year average ending in the first quarter of 2022, compared with the two previous years.[]
  8. 8. Most variable-rate mortgages in Canada have fixed payments. Therefore, when mortgage rates go up, most borrowers pay down less principal as a share of their regular payment. At renewal, these borrowers will then have to increase their regular payment to maintain their amortization schedule. Similarly, a longer amortization period not only reduces monthly payments but also removes the option to extend amortization if an adverse income shock occurs. Note that while insured mortgages have a maximum amortization period of 25 years, uninsured mortgages can be paid over a longer period.[]
  9. 9. When analyzing the stock of debt, the Bank considers highly indebted households to be those with a debt-to-income ratio greater than 350%. This is in contrast to flow data (mortgage originations), for which the Bank defines the vulnerability as a loan-to-income ratio greater than 450%.[]
  10. 10. Bank staff used the updated version of the HRAM to estimate how household balance sheets have likely evolved since 2019, the most recent year for which these data were available.[]
  11. 11. The direct impact captures changes to the cost of servicing existing mortgage debt. This analysis does not include broader implications of higher interest rates on households through effects on employment, income and inflation.[]
  12. 12. For a discussion of interest rate risk in the context of the previous tightening cycle, see O. Bilyk, C. MacDonald and B. Peterson, “Interest Rate and Renewal Risk for Mortgages,” Bank of Canada Staff Analytical Note No. 2018-18 (June 2018).[]
  13. 13. In this loan-level simulation, each mortgage is assumed to be renewed at a different mortgage rate based on borrower characteristics and when the mortgage was originated. The rates reported here are therefore the median rates at which households are assumed to renew their mortgage. The renewal rates are based on increases of 285 and 240 basis points for variable- and fixed-rate mortgages, respectively, compared with the rate at which these mortgages were originated. These rates are consistent with market expectations on June 3, 2022. In particular, the path for the variable rate adds the market expectations of the Bank’s policy rate between 2022 and 2025–26, as determined by the overnight index swap rate, and the median gap between variable mortgage rates and the policy rate over 2014⁠–⁠19. Similarly, the fixed mortgage rate adds the market expectation of the yield on five-year Government of Canada (GoC) bonds in 2025–26, as determined by five-year GoC futures, and the median gap between fixed mortgage rates and the yield on five-year GoC bonds over 2014–19.[]
  14. 14. Staff also assume households strictly follow the payment schedule in their mortgage agreements. In this exercise, households do not make accelerated or lump-sum payments, renew early, lock in a fixed rate on a variable-rate mortgage or fall into arrears. Staff also assign variable-rate mortgages as fixed or variable payments depending on the product offered most by their lender. About 75% of variable-rate mortgages have fixed payments.[]
  15. 15. See L. Morel, “Analyzing the house price boom in the suburbs of Canada’s major cities during the pandemic,” Bank of Canada Staff Analytical Note (forthcoming).[]
  16. 16. For more details on the estimation of the House Price Exuberance Indicator, see U. Emenogu, C. Hommes and M. Khan, “Detecting exuberance in house prices across Canadian cities,” Bank of Canada Staff Analytical Note No. 2021-9 (May 2021).[]
  17. 17. The share of purchases by investors could be larger than reported here because the calculation excludes purchases made using cash only, those made by foreign buyers if the buyers did not obtain a mortgage in Canada and those made by businesses. The share may include the purchase of recreational properties, such as cottages. However, their inclusion does not significantly alter the findings. For details about how Bank staff identify purchases made by investors, see M. Khan and Y. Xu, “Housing demand in Canada: A novel approach to classifying mortgaged homebuyers,” Bank of Canada Staff Analytical Note No. 2022-1 (January 2022).[]
  18. 18. See, for instance, A. Haughwout, D. Lee, J. Tracy and W. van der Klaauw, “Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis,” Federal Reserve Bank of New York Staff Report No. 514 (September 2011).[]
  19. 19. See Chart 6 in Khan and Xu (2022).[]
  20. 20. The income that investors report to lenders in their mortgage application usually includes a portion of their actual or expected rental income. Unless investors occupy one of the investment units they purchase (for example, in a duplex), they must make a minimum down payment of 20%. They are also not allowed to have an insured mortgage on their investment properties.[]
  21. 21. The growth-at-risk framework quantifies downside risks to the economy by estimating the rate of future GDP growth that should be exceeded in all but the worst 5% of outcomes. This calculation accounts for the effects of financial vulnerabilities and financial market stress on GDP growth outcomes based on the economic variations typically observed in the past. For more details on growth at risk, see T. Adrian, N. Boyarchenko and D. Giannone, “Vulnerable Growth,” American Economic Review 109, no. 4 (2019): 1263–1289; and T. Duprey and A. Ueberfeldt, “Managing GDP Tail Risk,” Bank of Canada Staff Working Paper No. 2020-3 (January 2020).[]
  22. 22. Statistics Canada’s national balance sheet accounts cover private sector, non-financial businesses in Canada. These include small and medium-sized businesses.[]
  23. 23. Specifically, for firms at risk, both the interest coverage ratio and the current ratio are below 1. The interest coverage ratio captures the extent to which current earnings (measured as earnings before interest, taxes, depreciation and amortization) can cover interest expenses. The current ratio is defined as the ratio of current assets to current liabilities. A current ratio below 1 would therefore indicate a firm’s liquid assets are not sufficient to pay short-term debt obligations. For more information on firms at risk, see T. Grieder and C. Schaffter, “Measuring Non-Financial Corporate Sector Vulnerabilities in Canada,” Bank of Canada Staff Analytical Note No. 2019-15 (May 2019).[]
  24. 24. In the context of the ongoing monetary policy normalization in Canada and abroad, the Bank looked at the interest rate risk associated with the outstanding debt of publicly listed businesses. This exercise resembles the one presented for households in Box 1. A new firm-level dataset allows for the analysis of the composition and maturity of the debt held by publicly listed firms in Canada. See Box 3 for a description of this new dataset.[]
  25. 25. Leveraged loans are high-yield syndicated loans provided to non-financial businesses, typically with non-investment-grade credit ratings. For more details, see Box 3 in the 2019 Financial System Review.[]
  26. 26. A high-yield corporate bond is a type of corporate bond that offers a higher interest rate because of its higher risk of default compared with an investment-grade bond.[]
  27. 27. Between 2007 and 2020, the share of Canadian fixed-income mutual funds allocated to corporate bonds increased by 17 percentage points, and their allocation to BBB-rated corporate debt increased by 19 percentage points. See R. Arora, G. Bédard-Pagé, G. Ouellet Leblanc and R. Shotlander, “Bond Funds and Fixed-Income Market Liquidity: A Stress-Testing Approach,” Bank of Canada Technical Report No. 115 (April 2019).[]
  28. 28. See Box 3 of the 2021 Financial System Review for a summary of how demand for liquidity by asset managers in fixed-income markets overwhelmed the capacity of banks to supply it in March 2020. For a more detailed assessment, see J.-S. Fontaine, C. Garriott, J. Johal, J. Lee, and A. Uthemann, “COVID‑19 Crisis: Lessons Learned for Future Policy Research,” Bank of Canada Staff Discussion Paper No. 2021-2 (February 2021).[]
  29. 29. This group includes fixed-income and mixed-investment funds, financing companies, non-bank investment dealers, private-label securitization and pension fund repurchasing agreement assets. For an explanation of why the Bank monitors these entities, see R. Arora, G. Bédard-Pagé, P. Besnier, H. Ford and A. Walsh, “Non-bank financial intermediation in Canada: A pulse check,” Bank of Canada Staff Analytical Note No. 2021-2 (March 2021).[]
  30. 30. Bank staff continue to assess this vulnerability and research potential channels to increase bank capacity to intermediate in fixed-income markets. See Jessie Chen, Johannes Chen, S. Ghosh, M. Pandey and A. Walton, “Potential netting benefits from expanded central clearing in Canada’s fixed-income market,” Bank of Canada Staff Analytical Note (forthcoming), for an analysis of how expanded membership in central counterparties could reduce the amount of capital required to intermediate in fixed-income markets. See D. Cimon and A. Walton, “Fixed-income dealing and central bank interventions,” Bank of Canada Staff Analytical Note (forthcoming), for an explanation of how a central bank can most efficiently target its asset purchases to increase the capacity of banks to intermediate in fixed-income markets.[]
  31. 31. The liquidity coverage ratio (LCR) is defined as the ratio of high-quality liquid assets to total net cash outflows over the next 30 calendar days. The objective of the LCR is to improve bank liquidity and limit the need for public support.[]
  32. 32. A forthcoming staff analytical note will describe the balance sheet mechanics of QE and QT for the Bank and the Canadian banking system.[]
  33. 33. On April 20, 2022, the Canadian Centre for Cyber Security issued a joint cyber security advisory with authorities from the United States, Australia, New Zealand and the United Kingdom, providing details on the demonstrated threats and capabilities of Russian state-sponsored cyber criminals against Ukraine and other jurisdictions. The advisory notably states that “some of these [Russian-aligned] cybercrime groups have recently […] threatened to conduct cyber operations in retaliation […] against countries or organizations providing materiel support to Ukraine.”[]
  34. 34. The spring 2022 Financial System Survey was conducted between February 22 and March 18. Not all responses may have accounted for the implications from Russia’s invasion of Ukraine, which began on February 24.[]
  35. 35. See Chart 15 in the Bank’s 2021 Financial System Review.[]
  36. 36. The ISSB is a newly created organization that will establish one of its two global offices in Montréal. For information on its proposed requirements, see International Financial Reporting Standards Foundation, “ISSB delivers proposals that create comprehensive global baseline of sustainability disclosures,” press release (March 31, 2022).[]
  37. 37. See US Securities and Exchange Commission, “SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors,” press release (March 21, 2022).[]
  38. 38. See Canadian Security Administrators, “Climate-related Disclosure Update and CSA Notice and Request for Comment Proposed National Instrument 51-107 Disclosure of Climate-related Matters,” consultation notice (October 18, 2021).[]
  39. 39. The four pillars of climate disclosure are governance, strategy, risk management, and metrics and targets. See Recommendations of the Task Force on Climate-related Financial Disclosures, Task Force on Climate-related Financial Disclosures (June 2017).[]
  40. 40. Canada’s Big Six banks are federally regulated financial institutions that have been designated as systemically important to the Canadian financial system by the Office of the Superintendent of Financial Institutions. They are the Royal Bank of Canada, Toronto Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada.[]
  41. 41. See United Nations, Net-Zero Banking Alliance.[]
  42. 42. See Government of Canada, “Climate Disclosures for Federally Regulated Institutions,” Budget 2022: A Plan to Grow Our Economy and Make Life More Affordable; and Office of the Superintendent of Financial Institutions, “OSFI consults on expectations to advance climate risk management,” news release (May 26, 2022).[]
  43. 43. See “Today’s Cryptocurrency Prices by Market Cap” from CoinMarketCap.[]
  44. 44. See Financial Stability Board, “Assessment of Risks to Financial Stability from Crypto-assets,” (February 16, 2022).[]
  45. 45. The figure on Bitcoin ownership for 2021 is from the Bank’s Bitcoin Omnibus Survey, the results of which will be released in a forthcoming publication. The increase in Bitcoin ownership in 2021 reflects easier access to Bitcoin using mobile applications and increased investments by Canadians. For more information, see D. Balutel, M.-H. Felt, G. Nicholls and M. Voia, “Bitcoin Awareness, Ownership and Use: 2016–20,” Bank of Canada Staff Discussion Paper No. 2022-10 (April 2022).[]
  46. 46. Businesses that deal in virtual currencies—such as providing exchange or value transfer services—are considered money services businesses under Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime. They are required to have a compliance program, keep records and report transactions that involve large amounts of virtual currencies or are suspicious, among other obligations. Financial entities that allow virtual currency transactions and offer virtual currency services are also subject to these requirements.[]
  47. 47. See The White House, “Executive Order on Ensuring Responsible Development of Digital Assets,” (March 9, 2022).[]
  48. 48. See Government of Canada, “Addressing the Digitalization of Money,” Budget 2022: A Plan to Grow Our Economy and Make Life More Affordable.[]
  49. 49. Less often, stablecoin issuers maintain the peg using automated approaches. For instance, mathematical algorithms manage the supply of coins to control their value relative to the fiat currency.[]
  50. 50. See Bank for International Settlements, “CPMI and IOSCO publish guidance, call for comments on stablecoin arrangements,” press release (October 6, 2021).[]
  51. 51. See A. Danaee, H. Grewal, B. Howell, G. Ouellet Leblanc, X. Liu, M. Patel and X. Shen, “How well can large banks in Canada withstand a severe economic downturn?” Bank of Canada Staff Analytical Note No. 2022-6 (May 2022).[]
  52. 52. The common equity Tier 1 capital ratio consists largely of ordinary shares, retained earnings and accumulated other comprehensive income.[]
  53. 53. The level of confidence was the highest reported since the first Financial System Survey in spring 2018.[]
  54. 54. In March 2021, Archegos Capital Management, a “family office” asset management company, suffered considerable losses due to a sudden downturn in certain equities that it had exposure to. Through the use of total return swaps and prime brokerage agreements with multiple banks, Archegos had been able to amass extremely high leveraged positions and was unable to meet its margin calls. This led to billions of dollars of losses for its lenders. See European Securities and Markets Authority, “Leverage and derivatives – the case of Archegos,” ESMA document number 50-165-2096 (May 2022).[]
  55. 55. See Financial Stability Board, “To G20 Finance Ministers and Central Bank Governors” (April 14, 2022).[]
  56. 56. For a discussion of impacts of a cyber attack that paralyzes the ability of one or several banks to send payments, see A. Kosse and Z. Lu, “Transmission of Cyber Risk Through the Canadian Wholesale Payment System,” Bank of Canada Staff Working Paper No. 2022-33 (May 2022).[]
  57. 57. See Microsoft, “Special Report: Ukraine—An overview of Russia’s cyberattack activity in Ukraine,” Digital Security Unit (April 27, 2022).[]
  58. 58. See Financial Stability Board, “Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities” (January 12, 2017); and International Organization of Securities Commissions, “Recommendations for Liquidity Risk Management for Collective Investment Schemes: Final Report,” (February 2018).[]
  59. 59. See Financial Stability Board, “Enhancing the Resilience of Non-Bank Financial Intermediation: Progress report” (November 1, 2021).[]
  60. 60. See Office of the Superintendent of Financial Institutions, “Amendments to the minimum qualifying rate for uninsured mortgages,” news release (May 20, 2021); and Department of Finance Canada, “Statement by the Deputy Prime Minister and Minister of Finance on the Canadian housing market” (May 20, 2021).[]
  61. 61. See Office of the Superintendent of Financial Institutions, “OSFI’s Annual Risk Outlook – Fiscal Year 2022-23” (April 21, 2022).[]
  62. 62. See Bank of Canada, “CARR publishes White Paper on the recommended future of CDOR,” market notice (December 16, 2021).[]
  63. 63. See Bank of Canada, “CARR welcomes RBSL’s decision to cease the publication of CDOR after June 28, 2024,” market notice (May 16, 2022).[]
  64. 64. See Office of the Superintendent of Financial Institutions, “OSFI’s expectations for CDOR Transition,” industry letter (May 16, 2022).[]
  65. 65. For more information, see Global Foreign Exchange Committee, “FX Global Code” (July 2021). As well, see the Bank’s “Statement of Commitment to the FX Global Code.”[]
  66. 66. See Bank of Canada and Office of the Superintendent of Financial Institutions, Using Scenario Analysis to Assess Climate Transition Risk (January 2022).[]
  67. 67. See Bank of Canada, “Bank of Canada announces climate change commitments for COP26,” press release (November 3, 2021).[]
  68. 68. See P. Miller and A. Olivares, “A road map to payment systems,” Bank of Canada The Economy, Plain and Simple (July 2020).[]
  69. 69. See Bank of Canada, “Bank of Canada designates Lynx as a systemically important payment system,” press release (September 1, 2021).[]
  70. 70. In fact, on April 29, 2022, Payments Canada officially decommissioned the former Large Value Transfer System. See Payments Canada, “A look back at the Large Value Transfer System (LVTS),” press release (May 2, 2022).[]
  71. 71. Find out more about the Bank’s role in the new framework for retail payments supervision.[]

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