Bank of Canada warns widening global imbalances and non bank finance are increasing financial stability risks

In published remarks, Bank of Canada Governor Tiff Macklem said widening global trade and capital flow imbalances are becoming more dangerous because they are interacting with a financial system that is faster, more complex and less transparent than in the past. His core message was that the risks should be assessed through capital flows and international investment, not trade balances alone, because persistent imbalances can misallocate capital, inflate asset prices and transmit stress across borders, particularly through the United States. Macklem linked the current pattern of imbalances to domestic conditions in the largest jurisdictions, with China relying too heavily on investment and exports, the United States absorbing large capital inflows alongside strong consumption and fiscal deficits, and Europe saving more than it invests. He said the central financial stability concerns are that capital flowing into the United States could again be misallocated into stretched equity and credit valuations or reverse abruptly, while a larger role for hedge funds, private finance companies, pension funds, asset managers and US-dollar stablecoins has made the system less regulated and less visible to authorities. To support smoother adjustment, he set out three priorities: keep trade and investment relationships open, make more markets outside the United States attractive destinations for global savings through stronger institutions and investable assets, and improve transparency through better data, stress testing and cooperation among bodies including the International Monetary Fund, the Financial Stability Board and the Bank for International Settlements.