BoC affirms stability of Canada’s economy: Financial system secure

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Macklem: No significant change to Canada's 'fiscal track'



The Bank of Canada’s Financial Stability Report reveals both stability and risks within the Canadian financial system. While proactive steps have been taken to adjust to higher interest rates and economic shocks, there are still concerns that need to be addressed.

## **Stretched Asset Evaluations**

The central bank warns about the risks associated with stretched asset evaluations, particularly within the non-banking sector. Participants such as pension funds and hedge funds have significantly increased their leverage, posing a potential threat to financial stability. The use of leverage in the non-bank financial sector could amplify the effects of a sharp correction, leading to system-wide stress.

While some asset managers have increased liquidity and shifted their investments towards government bonds, the high concentration of cash equivalent assets among market participants could result in a fire sale during market downturns, escalating financial stress.

## **Household Debt**

The report highlights concerns about household debt, particularly among non-mortgage holders who are experiencing financial distress. Renters appear to be the most impacted, with rates of arrears on credit cards and car loans increasing to pre-pandemic levels. Non-mortgage borrowers carrying a high credit card balance are more likely to miss future debt payments.

Mortgage holders, especially those with 5-year fixed mortgages, face higher monthly payments as they renew their mortgages. The bank identifies these higher monthly mortgage payments as a risk, especially in the event of an economic shock or rise in unemployment.

## **Canadian Businesses**

Insolvencies among Canadian businesses have spiked, surpassing pre-pandemic averages due to factors such as higher borrowing costs, slower economic activity, and the phasing out of pandemic support programs. While large businesses show financial health, smaller businesses are experiencing more financial stress, as insolvency filings have seen a recent surge.

In conclusion, the Financial Stability Report sheds light on the current state of the Canadian financial system, outlining risks that need to be addressed. It is crucial for stakeholders to remain vigilant and take necessary measures to ensure the resilience of the financial system amidst ongoing challenges and uncertainties. The stability of the financial system relies on proactive risk management and a comprehensive understanding of the interconnected factors at play.



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