Monitoring the ongoing adjustment to higher interest rates
The Bank analyzed a wide range of data to assess how households and businesses were adjusting to higher interest rates.
This analysis helped the Bank understand the diverse experiences of those facing increases in mortgage costs. For example, some households adjusted their mortgage payments in advance to reduce payment shock at renewal, while first‑time homebuyers relied more heavily on parental support than in the past to quality for a mortgage. Also, mortgage stress tests have improved the resilience of borrowers facing higher interest rate payments.
Assessing the risks associated with overpriced assets
The Bank warned that a sharp correction in asset values, coupled with increased leverage in the non‑bank financial intermediation sector, could lead to system‑wide stress. It also noted that because the financial system is highly interconnected, a problem in one sector could spread to other sectors.
Bank staff examined the interdependencies between banks, non‑bank financial institutions and markets. This included work that explored:
- how to measure contagion risk among Canadian financial institutions
- how Canadian banks are exposed to foreign non‑bank financial institutions
- how the increasing use of leverage for relative‑value trading strategies by non‑bank financial institutions could affect financial stability
- how Canadian life insurers manage liquidity risks during periods of stress
- how market structure affects liquidity in government bond markets
Collaborating to enhance the Bank’s financial stability assessments
The Bank continued to lead the Heads of Regulatory Agencies Committee and the Systemic Risk Surveillance Committee. Through these federal‑provincial forums, public sector authorities share information and work together to promote the resilience of Canada’s financial sector.
The Bank also began working with domestic authorities and the International Monetary Fund to complete an in‑depth assessment of Canada’s financial sector, which is conducted every five years. The report will be published in 2025.
Analyzing the link between monetary policy and financial stability
The financial system plays a critical role in transmitting monetary policy to the economy. Therefore, the Bank considers risks to the financial system when making its monetary policy decisions. In 2024, Bank staff used microdata on individual loan characteristics—such as credit card spending and the timing of mortgage renewals—to look at how changes in monetary policy affect the outlook for consumption.
The Bank also continued to examine how monetary policy and macroprudential policies work together to ensure both price stability and financial stability.
Promoting the resilience and efficiency of the financial system
Fostering financial stability through periods of stress
Part of the Bank’s financial stability mandate is to oversee Canadian financial market…
Read More: Financial system – Bank of Canada
