Bank of Canada Still Sees Country's Financial System Functioning Well Despite U.S. Tariff Turmoil, Geopolitical Risks

11:20 AM EDT, 05/28/2026 (MT Newswires) -- Bank of Canada views households and businesses as being in "stable condition," said Desjardins after Thursday's presentation of the BoC's 2026 Financial Stability Report (FSR).

While household debt levels remain elevated, the FSR pointed out that wealth has been on the rise, noted the bank. Metrics measuring household stress haven't changed much over the past year. The share of borrowers in arrears is still elevated amongst non-mortgage holders, with arrears for mortgage holders remaining low overall.

That said, there have been pockets of weakness even within mortgage holders, stated Desjardins. Those with the largest mortgage balances have experienced the most stress, with the Toronto area a particular concern.

Over the next 12 months, roughly 12% of mortgage holders are expected to face higher payments, with an average increase of 15%, similar to last year. However, those with shorter terms won't, on average, see their payments increase.

Looking further ahead, the BoC noted that, "By the second half of 2027, nearly all mortgage holders facing large payment increases will have renewed".

Businesses also remain on a steady footing. The FSR shows that non-financial firms continue to hold more cash and liquid assets than was the case before the pandemic. The central bank noted, "Even in sectors most vulnerable to US tariffs-such as manufacturing-financial health has remained broadly stable".

After rising for a couple of years, impairment rates on business loans have plateaued overall, even though smaller businesses are still seeing rising loan impairments.

Policymakers believe that Canada's largest banks are now even more capable of withstanding shocks than they were previously, added the BoC. The FSR says that, "Improved profitability and good access to funding are supporting resilience."

The banks have also set aside additional funds to guard against the myriad of risks facing the Canadian economy. Central bankers wrote, "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."

By definition, the FSR is a document focused on risks, but the BoC's optimism in several key areas is comforting even for the base case economic outlook, added Desjardins. The months to come could bring extreme volatility, with trade negotiations set to heat up and geopolitical risks still high.

The good news is the central bankers believe the Canadian financial system is adequately prepared for whatever harsh weather may come, thereby reducing the perceived probability of tail risks materializing, according to the bank.

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