BoC: Trade war with US threatens Canadian economy and poses risks to financial stability

In its annual Financial Stability Report, the Bank of Canada said the trade war with the United States threatens the Canadian economy and poses risks to financial stability, per Reuters.

Key takeaways

"In extreme circumstances, market volatility could turn into market dysfunction."

"Canada's financial system is resilient; banks are well positioned to cope with a period of stress."

"Main near-term concern is the risk of a disorderly market sell-off; in extreme crisis, authorities might have to provide liquidity."

"Severe and long-lasting global trade war could push rate of mortgage arrears beyond levels seen in 2008-09."

"If household and business credit defaults were to occur on a large scale, banks could see greater losses than they have provisioned for."

"In a period of stress, hedge funds could find it harder to maintain their presence in government of Canada markets."

"BoC is less concerned about impact of high borrowing costs on debt serviceability than it was a year ago."

"More than 90% of mortgage holders with 5-year fixed rate mortgages should be able to make higher payments."

"Credit losses could lead banks to reduce lending and this could exacerbate an economic downturn."

"Also watching availability of credit and conditions for funding and market liquidity."

"Will closely watch indicators of financial stress and evidence of precautionary behavior by financial system participants."

Market reaction

USD/CAD showed no immediate reaction to this publication and was last seen gaining 0.25% on the day at 1.3872.