Bank of Canada says financial system is solid, but vulnerabilities have grown

By Promit Mukherjee and David Ljunggren OTTAWA, May 28 (Reuters) – The Canadian financial system is in good shape but vulnerabilities are growing amid a highly volatile economic and geopolitical environment, the Bank of Canada said on ​Thursday. “Our overall view is that the Canadian financial system remains well positioned ‌to weather shocks,” Senior Deputy Governor Carolyn Rogers said after releasing the central bank’s Financial Stability Report. “However, vulnerabilities have increased in some parts of the system,” she added. Govenor Tiff Macklem, who normally presents the report, was away dealing with an urgent personal matter. Issued once a year, the ‌report ​takes stock of the current financial market and highlights ⁠the risks and vulnerabilities that ⁠could compromise economic resilience. The economy has spent more than a year dealing with a raft of tariffs from President Donald Trump, upending the job market and production in crucial sectors and hurting economic growth. High stock market valuations, higher corporate ​debt and higher amounts of money borrowed by hedge funds to buy sovereign debt are some vulnerabilities, Rogers said. These risks can be managed individually but ⁠an increasingly volatile economic and geopolitical environment ⁠could cause problems. “This has made it more likely that a new ​shock or a combination of shocks could cause several vulnerabilities to crystallize at once,” ​Rogers said. “A cascading series of events could cause a sharp loss ‌of investor confidence and lead to a spike in demand for liquidity or rapid asset sales.” The impending review of the North American free trade deal and the oil shock from the Iran war are risks that could hit the economy hard. In last ⁠year’s report, Macklem had highlighted the risks of a prolonged trade war with the U.S. which could potentially curtail the ability of households and businesses to pay debt. “So ⁠far, the impacts have been ‌less widespread than we feared,” said Rogers. Deputy Governor Toni ⁠Gravelle said while Canadian households carried higher debt, the share ​of borrowers ‌behind on debt payments had stabilized. The BoC expects the ​wave of people ⁠renewing mortgages at a higher rate, a key risk observed last year, to fully pass by the second half of 2027, he said, adding even the financial health of businesses was broadly stable. Big Canadian banks, which account for the bulk of the domestic banking system, have reported higher profitability and capital buffers, reflecting robust financial health. (Reuters ​Ottawa editorial) Keywords: CANADA CENBANK/