Risk slightly higher, but the system remains resilient
The overall risk to the Canadian financial system has increased slightly since our last assessment in June 2018. This increase is due to a slowdown in economic growth, caused in part by global trade policy uncertainty, last year’s oil price decline, ongoing difficulties in the energy sector and expanded risk taking in global financial markets.
The most important risks to Canada’s financial system remain a severe nationwide recession, a large house price correction and a sharp repricing of risk in financial markets. A recent stress test conducted by our staff considers these risks and finds if they materialized, large Canadian banks would be well positioned to manage them, which in turn would mitigate the effects on the wider financial system. At the same time, a second stress shows a scenario in which a material rise in interest rates would result in large redemptions in corporate bond mutual funds, causing a material widening in corporate spreads, which may exacerbate liquidity conditions.
Overall, the financial system remains resilient, and confidence among market participants continues to be high.