The Bank of Canada’s latest Financial Stability Report indicates that while Canada’s financial system remains resilient, it faces rising risks from a volatile global and domestic environment.

Households have largely navigated mortgage renewals successfully, aided by prior stress tests, extended amortizations, and retreating interest rates, with the final wave of renewals expected to be manageable by late 2027.Canadian banks remain well-capitalized to absorb potential losses, even in severe economic downturns.However, vulnerabilities are increasing in several areas.High stock market valuations, driven in part by enthusiasm for artificial intelligence, pose the risk of a market correction.

Additionally, large issuances of government debt purchased by heavily leveraged hedge funds could amplify financial stress if short-term funding markets become disrupted.The Bank also highlighted geopolitical and trade-related threats, including potential setbacks in U.S.-Canada trade negotiations and rising global oil prices due to conflicts in the Middle East.

In a severe scenario combining these factors, Canada could experience a 1 per cent GDP decline, 10 per cent unemployment, and a 25 per cent drop in home prices.

Despite these risks, the Bank maintains that Canada’s financial institutions are positioned to weather shocks, but stresses the need for vigilance given the increasingly volatile economic and geopolitical environment.