Financial system resilience

At the time of the previous Report, the United States had only recently begun pursuing its new trade policy. The situation was highly volatile, making it difficult to predict how the Canadian economy and financial system would be affected.

So far, the impacts have been less widespread than was initially feared. Most Canadian trade with the United States remains tariff‑free, the Canadian economy has been resilient, and changes in US trade policy have not led to a broad and lasting deterioration in financial conditions. Still, sectoral tariffs have hurt activity in affected industries, and the future of Canada’s trade agreement with the United States and Mexico remains uncertain.

The war in the Middle East has added to global uncertainty, disrupting shipments of oil and other key commodities through the Strait of Hormuz, damaging regional energy infrastructure and driving up commodity prices. Energy and financial markets have been volatile in response to evolving developments but have so far continued to function well.

Against this backdrop:

• Households and businesses remain in broadly the same financial condition as in the previous Report. After having increased since 2022, indicators of both household and business financial stress have plateaued over the past 12 months. Household indebtedness remains high but below recent peaks, while household wealth and incomes have risen. Businesses have maintained healthy balance sheets 
• Canada’s large banks have grown more resilient due to higher profitability and a stabilization in the performance of their loan portfolios. In response to the dramatic shift in US trade policy and its impact on the economy, banks have also set aside more funds to cover potential credit losses 
• Vulnerabilities related to non-bank financial intermediaries have continued to grow. Asset managers have further increased their use of repurchase agreement (repo) leverage,1 leaving them vulnerable to a sudden increase in liquidity needs or a reduction in the funding available in repo markets. However, some asset managers have taken steps to reduce their risk exposures.
• Financial markets have also grown more vulnerable. Geopolitical developments have led to periods of increased volatility, while corporate bond and equity valuations are stretched relative to historical norms. Growing government debt issuance globally is also contributing to rising term premiums in sovereign yields.

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