Canadian Financial System Faces New Risks Amid Shifting Trade Policies

As 2025 unfolds, Canada’s financial system finds itself standing firm but watchful, according to the latest assessment by the country’s central bankers.

While past years saw households, businesses, and financial institutions successfully weather the economic upheaval of the pandemic and surging interest rates, new uncertainties have emerged. Chief among them is a dramatic shift toward protectionism in US trade policy, which has led to higher tariffs, heightened market volatility, and an overall increase in risks to financial stability. A drawn-out trade conflict not only threatens Canada’s export prospects but also raises the potential for slower growth and higher unemployment, pressuring both households and businesses already carrying historically high levels of debt.

The Financial Stability Report highlights that although total household debt has edged lower, financial stress has increased, particularly among those without mortgages. Many homeowners will face higher payments as they renew their mortgages, and a significant economic shock—such as a protracted trade war—could push some into arrears. Businesses, especially those exposed to global trade and with less robust balance sheets, also face growing risks of falling behind on debt obligations.

Canada’s banks are noted for their resilience, having grown their capital buffers and increased provisions for potential credit losses. Yet, if losses were to escalate, tighter lending could deepen economic trouble for households and businesses. In addition, the growing influence of hedge funds in government bond markets adds a layer of complexity; their heavy use of leverage could create instability if market volatility surges and they rush to exit positions, as was recently demonstrated in the US Treasury market.

In summary, while Canada’s financial system has shown its ability to absorb past shocks, it now faces a new test from global trade tensions and evolving market dynamics. Ongoing vigilance and proactive identification of vulnerabilities are essential to ensure stability and resilience in the face of mounting uncertainties.