Bank of Canada warns of rising financial risks

The Bank of Canada released its Financial Stability Report on Thursday, noting vulnerabilities have increased in some parts of the country’s financial system.

In Thursday’s press conference, Senior Deputy Governor Carolyn Rogers says that despite a tough year, Canada’s financial system, households, and businesses remain stable, with banks showing increased resilience.

However, Rogers warned that stocks and corporate debt are currently valued much higher than historical averages. She says as the issuance of global sovereign debt rises, hedge funds are playing a larger role in purchasing it, often relying on borrowed money to do so.

“In normal times, hedge fund activity helps keep markets running smoothly. But if conditions become strained, this activity could amplify stress and disrupt core funding markets,” she says.

“Individually, these and other vulnerabilities look manageable. However, the economic and geopolitical environment has become more volatile,” Rogers says.

She says the interaction of these vulnerabilities means a sudden shock could trigger a cascading crisis, leading to a sharp loss of investor confidence and severe pressure on global funding markets.

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Rogers says at the time of the 2025 Report, there was concern that tariffs and trade uncertainty could lead to market volatility, strains on liquidity or even market dysfunction. But as of now, the impacts have been less widespread than originally feared.

Deputy Governor Toni Gravelle says, “The main concern for both households and businesses is a geopolitical or economic shock that leads to a deep recession and a sharp rise in unemployment.”

“Our overall view is that the Canadian financial system remains well positioned to weather shocks. Over the past year, it has faced repeated tests. While there have been some strains, those episodes did not lead to broad-based financial stress,” she says.

“Still, we must stay vigilant. We will continue to monitor vulnerabilities closely and remain in regular contact with financial system participants and with domestic and international partners,” Gravelle says.

“A stable and resilient financial system absorbs shocks rather than amplifying them, and that benefits every Canadian,” she says.

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