Overview

• The Bank of Canada affirms that the financial system remains resilient but warns of growing risks tied to a prolonged U.S.–Canada trade war.
• Unpredictable U.S. trade policy is driving short-term market volatility and liquidity strains, with potential for market dysfunction in extreme cases.
• Debt-servicing challenges are concentrated among non-mortgage households and leveraged hedge funds, posing broader financial stress risks.
• A severe trade war scenario could push mortgage arrears beyond 2008–09 crisis levels and lead to significant credit losses, curbing lending and deepening an economic downturn.
• While households and businesses showed increased resilience in 2024 due to lower interest rates, sustained trade tensions threaten to reverse these gains by reducing growth and increasing unemployment.