Canadian Financial Stability Report—2025

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A stable and efficient financial system is essential for sustaining economic growth and raising standards of living. In the Financial Stability Report, the Bank of Canada assesses the resilience of the Canadian financial system and focuses on key risks that could undermine its stability. Ultimately, financial stability benefits all Canadians.

Learn more about the Bank of Canada's framework for assessing financial stability and explore our interactive data visualization dashboard.

Overall Assessment

Key Takeaways

• Canada's financial system is resilient. Overall, households, businesses, banks and non-bank financial intermediaries successfully weathered the pandemic, a period of elevated inflation, and sharp increases in interest rates.
• Over the past 12 months, Canadian households have been carrying, on average, less debt relative to their income, and insolvency filings by businesses have dropped significantly. But there are pockets of financial stress.
• The economic impacts of the pandemic, as well as elevated housing prices due to persistent imbalances in the housing market, have led to higher levels of debt for some households and businesses, making them more vulnerable to financial shocks.
• Recently, large and abrupt shifts in the direction of US trade policy have led to some bouts of extreme market volatility, including in the normally low-risk market for US Treasuries.
• The trade war currently threatens the Canadian economy and poses risks to financial stability. Near-term unpredictability of US trade and economic policy could cause further market volatility and a sharp repricing in assets, leading to strains on liquidity.
• In the medium to long term, a prolonged global trade war would have severe economic consequences, potentially leading to widespread defaults on household and business debt.

The Financial System Began 2025 with Increased Resilience

From the time of the 2024 Report until the beginning of 2025, major central banks eased monetary policy as inflation fell worldwide. Lower policy interest rates helped reduce vulnerabilities in the financial system related to debt serviceability.

Despite brief periods of volatility in global markets, Canadian fixed-income and other core funding markets functioned well, and debt issuance conditions remained solid. Banks maintained elevated levels of capital and liquid assets. Non-financial businesses also kept healthy balance sheets. As interest rates declined, the pressure on businesses and households with variable-rate debt and those facing mortgage renewals also eased.

The Trade War and Pervasive Uncertainty Have Rattled Markets

Since January, the unpredictability of US trade policy has caused a sharp increase in uncertainty and market volatility. The new tariffs announced by the United States in early April were significantly larger than market participants had anticipated. This led to sharp repricing in equity, bond and currency markets as investors revised their economic outlooks.

Benchmark equity indexes fell sharply before recovering almost entirely, while stock market volatility rose to its highest level since the COVID-19 crisis. Sovereign bond yields in Canada and the United States saw large swings. Many investors appeared to diversify away from US assets. The US dollar and US Treasuries weakened in tandem with stocks instead of playing their traditional safe-haven roles amid uncertainty.

Households

Many households continue to adjust to higher debt-servicing costs that were a key concern in the previous Report. Mortgage holders have proved resilient in the face of higher payments. Signs of financial stress have increased over the past 12 months but remain concentrated among households without a mortgage.

While interest rates have come down significantly over the past year, previous increases in interest rates are still affecting mortgage renewals. A large share of mortgages being renewed this year or next were taken out during the pandemic at historically low interest rates. Despite rates being much lower than they were 12 months ago, most of these households will still see payment increases when they renew.

While indebtedness remains elevated, it has come down over the past 12 months—the ratio of household debt to disposable income has declined from 179% to 173%. With interest rates lower now than a year ago, the Bank is less concerned about the impact of high borrowing costs on debt serviceability.

However, the trade war is threatening jobs and incomes, particularly in trade-dependent industries. Some affected households may become unable to continue making debt payments, which could lead to credit losses at banks.

Non-Financial Businesses

Non-financial businesses adjusted well to past interest-rate increases and have generally remained in solid financial health over the past 12 months. Larger firms have been supported by their diversified sources of funding and by the fact that most have long-term financing in place. Last year's surge in insolvency filings by small businesses proved temporary, as anticipated.

The trade war will test the financial resilience of businesses in industries tied to trade. Those with existing vulnerabilities—high leverage, weak profitability and low cash reserves—are at risk of falling behind on debt payments, which could lead to losses for both banks and investors.

Banks

Canadian banks remain well positioned to support the financial system and the broader economy, even through a period of financial stress. They have good access to funding through deposits and wholesale markets, and credit performance has been strong.

Banks have increased their accumulated provisions for anticipated loan losses and maintain elevated capital levels to absorb unexpected losses. Stress-testing exercises conducted with the IMF show that even in a severe economic scenario with a 5.1% GDP decline and 9.2% unemployment, bank capital would remain above regulatory minimums.

Non-Bank Financial Intermediaries

As the activities of non-bank financial intermediaries (NBFIs) have evolved, so have the risks associated with them. Some asset managers have taken on higher levels of leverage in Canada, leaving them vulnerable to sudden demands for liquidity, such as through margin calls.

Canadian and foreign-based hedge funds have become increasingly active participants in Canadian government bond and repo markets. They now buy almost 50% of the auction volume in some tenors of Government of Canada bonds and represent about 30% of the volume of trades in the secondary market.

A shock that leads hedge funds to suddenly withdraw from these markets could amplify financial stress, as seen in US bond markets in early April. The trade war increases the risk of even more frequent and severe shocks in the future.

Key Risk Monitoring Focus

The Bank will closely monitor:

• Indicators of financial stress—such as delinquency rates for businesses and households
• Evidence of precautionary behaviour—such as borrowers drawing on lines of credit more than usual
• Availability of credit—particularly for workers and firms in sectors heavily exposed to tariffs
• Conditions for funding and market liquidity—especially in government bond and repo markets

The Bank will continue to work closely with federal and provincial financial authorities to monitor and assess the health of Canada's financial system and to address potential emerging issues. The objective is to foster a stable and resilient financial system that absorbs shocks and can support the economy through periods of turbulence.

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This analysis was produced by the Governing Council of the Bank of Canada: Tiff Macklem, Carolyn Rogers, Toni Gravelle, Sharon Kozicki, Nicolas Vincent, Rhys Mendes and Michelle Alexopoulos.

Read the full interactive report with data visualizations.