Banks

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

Canada’s large banks remain in solid financial health. Since the previous Report, the economic environment has become more challenging amid ongoing trade tensions and increasing geopolitical conflicts.

For banks, these developments could eventually lead to higher credit losses or make it more difficult and costly to raise funding from investors. Accordingly, banks have set aside additional funds to cover potential loan losses. These provisions, combined with robust earnings and high levels of capital, leave banks well placed to absorb shocks.

Even in a stress test where an escalation of the war in the Middle East leads to a prolonged period of high oil prices and acute financial system stress, Canada’s large banks are expected to remain resilient and able to support the economy (see In focus: How a financial market correction could worsen the effects of an oil shock).

Financial health of the banking sector

Improved profitability and good access to funding are supporting resilience

The financial health of Canada’s large banks has improved over the past 12 months. Bank profitability has increased, supported by higher revenues from capital market activities. The deterioration in credit performance noted in the previous Report has stabilized, particularly for corporate lending.

Banks have continued to benefit from narrow funding spreads and strong investor appetite for their debt. As a result, they have maintained good access to funding despite temporary market stress following the outbreak of the war in the Middle East (Chart 12). As market conditions stabilized, Canadian banks were among the first to issue bonds again, signalling continued confidence from global investors.

Canada’s big banks have taken steps to protect themselves against potential shocks

Canada’s major banks remain well positioned to withstand economic shocks and continue lending to the broader economy. They have set aside additional funds to cover potential loan losses, reflecting increased risks to the Canadian economy from US tariffs and trade policy uncertainty. The accumulated stock of loan loss provisions as a share of total lending is now about 30% larger than it was three years ago (Chart 13).

These provisions are intended to absorb anticipated credit losses, and banks would rely on capital if losses were to exceed expectations. Large banks continue to maintain high levels of capital. Their common equity Tier 1 capital ratio averaged 13.7% in the first quarter of 2026, about 2 percentage points higher than before the pandemic and well above regulatory minimums.1

Risks to the banking sector

Disruptions to funding markets could limit banks’ capacity to support capital markets

Canada’s large banks rely not only on deposits but also on funding from wholesale markets. As a result, they are sensitive to shifts in global funding conditions. A further geopolitical shock could disrupt these markets, raising borrowing costs or making it harder to issue new debt. The impact would depend on which markets are affected and how long the disruption lasts.

Long‑term funding, such as bonds, is less affected by short‑term disruptions. In contrast, stress in short‑term markets—such as repo and commercial paper—matters more for banks’ day‑to‑day market intermediation. Stress in these markets could limit the ability of banks to finance securities and support trading. This would make it harder for other market participants to trade or raise cash (see the Non‑bank financial intermediaries section).

A severe and prolonged disruption in funding markets would be challenging for Canadian banks, given their reliance on wholesale funding and the growing contribution of capital market activities to revenues in recent years.

Geopolitical and trade tensions could have implications for credit losses

Credit losses could exceed banks’ current expectations if an escalation in US trade frictions or the war in the Middle East significantly weakens employment and economic activity. Trade tensions could create targeted pressures, especially for small and medium‑sized banks and credit unions that are highly exposed to regions or industries affected by increased tariffs.

Canada’s large banks are well diversified, which reduces their exposure to any single source of stress. Even under a severe stress‑test scenario, large banks would remain resilient, though credit losses would rise as economic conditions deteriorate (see In focus: How a financial market correction could worsen the effects of an oil shock).

Endnotes