Canada's financial system resilient, says Bank of Canada

Hinzugefügt: 2026-05-30

[00:00:00]Without an update from the Bank of Canada today, it issued its financial stability report and in it, the bank outlined what it sees as key risk to the Canadian economy. Let's go through them with Warren Lovely, National Bank Financial. Thanks for joining us today.

[00:00:14]>> Yeah, my pleasure.

[00:00:14]>> There are three areas of risk outlined, but the concern seems to be if more than one of them hits at a time. So, what could that look like? Can you give me an example?

[00:00:24]>> Yeah, well, so firstly on this risk assessment, some of these risks are familiar, some are newer, but yet very topical for for viewers. The the familiar risk is US trade policy uncertainty and viewers just heard about how trade uncertainty is impacting, you know, well-known companies. Most people understand this is a pretty serious risk for the Canadian economy, has been really since about a year ago. So, that one's not necessarily new. More recent, more topical, of course, is the war in the Middle East and the potential for financial market volatility there. And then another risk factor the Bank of Canada's flagging here is a disruption from AI, which is again something I think everyone's trying to get their head around. So, these risk factors have been identified. I think, Mireille, to your point, the concern is that you could have some of these dominoes fall one after the other or or sort of have this collection of risks occur at the same time, which could be more damaging for financial markets and the financial system.

[00:01:25]>> Okay, so with the markets on a run lately, valuations are also raised here as something to watch. Do you agree that's a concern?

[00:01:33]>> Well, look, this is a a risk assessment and if a an upside risk materializes, that's a bonus, that's maybe gravy. But what the Bank of Canada, I think rightly needs to do is focus on downside risks.

[00:01:45]You know, what if things go badly? And I think when you look at equity valuations, credit market valuations, it's pretty clear evaluations are lofty, elevated, stretched. So, that is a concern. We don't have cheap assets.

[00:01:59]We've got expensive risk assets. And then again, the other thing the bank is very clearly warning us about is that, look, the geopolitical backdrop, you know, Canada's relationship with the US, the situation in the Middle East is super fluid, very fluid, hard to assess how long, you know, the Middle East conflict's going to go, how it's going to play out. And of course, we've still got this not so subtle issue of a Canada-US trade agreement to get through. And there's a whole host of associated risks, economic and financial, associated with those geopolitical hotspots.

[00:02:34]>> So, one of the last uh big warnings from the bank uh in previous years was about mortgage renewals. Are we mostly past those concerns now?

[00:02:43]>> Yeah, we're working through that. And I think, Marla, that's a good point you raised. I mean, and to the bank's credit, I think they acknowledged something that most Canadians hopefully feel. And that is that our economy has actually proven resilient. Our financial system, our banks, have proven extremely resilient.

[00:02:59]And households are holding up. And you know, look, no one is going to say that the mortgage refinancing process has been easy for everyone. It's been tough for many. But the good news there is that we are working through this.

[00:03:12]There's still some to come. And anyone renewing a mortgage in the next 12 months here will probably see a a payment increase. Or they might need to extend their amortization and kind of rationalize things. So, that won't necessarily be easy, but we've done we've chopped a lot of wood on that mortgage refinancing file. And I think the other thing I'd emphasize is that when it comes to the banking sector, just look at the the recent results we just got from the six big Canadian banks. That also speaks to the resiliency of the financial system and the household sector more generally.

[00:03:46]>> Okay, let's talk about hedge funds, which was also brought up in the note by the Bank of Canada. Can you sort of expand on what that concern looks like?

[00:03:55]>> Yeah, so again, this isn't a new feature, but it's still uh uh raised and identified as a risk factor. And simply put, what's happening here is that governments have got to borrow. And they borrow to to finance deficits and investments. So, they go out in the market, they're raising money.

[00:04:11]Increasingly, we've been selling that government debt to leveraged players, hedge funds. And that sounds like a scary uh concept. And what the Bank of Canada is really trying to say is that, look, um those investors, their presence in the market is big.

[00:04:25]It's quite elevated. They might, you know, be 40% of the Government of Canada bond market in terms of their activity.

[00:04:32]And if things went badly, if all of those investors, those hedge funds, needed to exit at the same time, in the same way, that could be dislocative. And of course, that is a risk, but I think from our perspective, hedge funds have played a pretty important role here absorbing bond supply, financing governments, and are actually providing normal course liquidity. So, of course, there are risks there, but there's also some benefits from having a pretty active investor base in in the Government of Canada bond market.

[00:05:05]>> So, Warren, the last thing I want to talk about is AI, which as you mentioned was also raised by the Bank of Canada today as something to watch because it could go so many ways, right? We're looking at efficiencies that could be gained by by business. Uh we know banks are already beginning to use AI to get some value out of that. We had one of the banks talking about that today. So, what do you see as the overarching risk for AI?

[00:05:28]>> Well, I think one of the risks the Bank of Canada's pointing quite clearly to is the Look, the potential for, you know, cybersecurity concerns and the need to perhaps set aside, um you know, more money to to secure systems, financial systems, you know, against uh AI uh supported threats. So, there's that aspect of AI, the cybersecurity uh issue. The other risk that the Bank of Canada is mentioning is that, look, the financial system is global in nature. In a lot of cases, you've got systems that um that the financial system kind of relies on, you know, kind of centralized points or service providers. And if one of those got attacked by AI and brought down, that could have again cascading, wider-reaching impact. So, there's a few risk factors there. Of course, on the flip side, Morneau, as you point out, is the the hopeful aspect of this, and that is that, you know, this uh uh AI revolution could bring about what?

[00:06:28]Big productivity gains, uh and maybe drive growth uh longer term. We certainly know that firms are rushing to invest pretty aggressively, either to benefit from them or protect against AI.

[00:06:40]>> AI provisions is where we're going, I guess. All right, Warren, lovely.

[00:06:44]Appreciate you joining us. Thanks for your time.

[00:06:45]>> Thank you.