More households are expected to face financial pressure in the coming years as their mortgages are renewed. In light of higher borrowing costs, the Bank of Canada is more concerned than it was last year about the ability of households to service their debt. If the cost of wholesale funding were to rise significantly due to a persistent period of global financial stress, it could lead to Canadian banks tightening lending conditions, making it more difficult and expensive for Canadian households and businesses to access credit. The reliance of Canada’s large banks on wholesale funding makes them vulnerable to deteriorating conditions in global financial markets. Canadian banks remain robust, but they are not immune to international developments. As the financial sector adjusts to higher interest rates, participants, regulators and central banks must be more vigilant about vulnerabilities and risks.Ĭanadian regulators have taken important steps to help safeguard the financial system. These events have exposed vulnerabilities-notably, business models that rely excessively on an environment of low interest rates and low volatility-and serve as a reminder that risks can emerge and spread quickly. Authorities in these countries reacted swiftly, limiting the spillover effects to the broader financial system. Recent stresses in the banking sector in the United States and Switzerland further tightened financial conditions. Over the past year, financial conditions have tightened globally in response to monetary policy actions aimed at reducing inflation. These issues will be covered through regular postings to the Financial System Hub. Another key change is removing from the publication the discussion of issues related to the efficiency of the financial system. In short, it allows the Bank to take a more deliberate look at what could go wrong and what the implications would be for financial stability. This approach reduces repetition, improves readability and allows for a more concise and direct analysis of the nature and level of risk. For 2023, the Bank is no longer discussing financial system vulnerabilities and risks separately these are now combined under several key areas of concern. The structure of the Financial System Review is undergoing a series of changes to more clearly communicate the risks to financial stability. In the Financial System Review, the Bank of Canada identifies the key sources of concern for the financial system in Canada and explains how they have evolved over the past year. A stable and efficient financial system is essential for sustaining economic growth and raising standards of living.
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