Financial Stability Report

Canada’s financial system has continued to function well despite US tariffs and trade uncertainty. But a more turbulent global environment poses risks to financial stability, particularly if several vulnerabilities crystalize at the same time.

The war in the Middle East has led to periods of increased volatility and reduced liquidity in certain markets, particularly in energy. Nevertheless, markets have generally remained resilient. Equity valuations are still elevated, and credit spreads are compressed.

Overall, Canadian households have proven resilient. But debt levels are elevated, and some pockets of stress remain. The potential impact on employment from ongoing trade uncertainty and geopolitical conflicts is a key concern.

Canadian businesses remain in good financial shape overall, but risks are building. Trade uncertainty and geopolitical tensions could create new stress for some firms.

Canada’s large banks have grown more resilient. They remain well positioned to support the economy and the financial system even if conditions deteriorate.

Hedge funds have continued to increase their repo borrowing. While their activity supports market efficiency and liquidity, it could leave fixed‑income markets more vulnerable to the risk of a sudden sell‑off.

The war in the Middle East has pushed up oil prices, putting pressure on inflation. In a situation where geopolitical tensions trigger a severe tightening in financial conditions, the resilience of the financial system could be tested.

Repo markets are crucial for the functioning of government bond markets. They are also an important source of short-term funding. But their size and widespread use mean they can transmit financial stress if conditions deteriorate.

Globally, private credit lending has expanded rapidly and become increasingly connected to the broader financial system. Complex structures, limited transparency and the fact that private credit is untested in a downturn make it difficult to predict how the sector might amplify shocks.