Bank of Canada says financial system remains resilient despite US tariffs but warns global shocks could crystallize multiple vulnerabilities

The Bank of Canada has published its 2026 Financial Stability Report, concluding that Canada’s financial system has continued to function well despite US tariffs and trade uncertainty, but that a more turbulent global environment poses financial stability risks if several vulnerabilities materialize at the same time. The report says financial markets have generally remained resilient, households and businesses are broadly holding up, and Canada’s large banks are well positioned to support the economy and the financial system even if conditions deteriorate. Supporting detail points to stress concentrations rather than broad weakness. The war in the Middle East has caused periods of higher volatility and lower liquidity in some markets, particularly energy, while equity valuations remain elevated and credit spreads compressed. Household debt is still high and some pockets of stress remain, with employment effects from trade uncertainty and geopolitical conflict identified as a key concern. Businesses are in good financial shape overall, but risks are building. In non-bank finance, hedge funds have continued to increase repo borrowing, which supports market efficiency and liquidity but could make fixed-income markets more vulnerable to a sudden sell-off. The report also highlights vulnerabilities from a potential interaction between an oil shock and a market correction, the importance of repo market resilience, and the rapid global growth of private credit, where complex structures, limited transparency and a lack of downturn experience could amplify shocks.