Ottawa, May 8 (Reuters) – An prolonged trade war could increase the risks for Canadian financial stability by injuring banks and other institutions and making households and businesses on Thursday repaying debt, the Bank of Canada said on Thursday.
In its annual financial stability report, the Central Bank said that the financial system was resilient.
But the impacts of the prices struck by US President Donald Trump on Canada and Ottawa’s counter-tales could affect financial stability, especially if it continues for a long time.
“A long -term trade war is the greatest threat to the Canadian economy. It also increases risks for financial stability,” said the bank.
The BOC said that in the short term, the unpredictability of American trade policy could cause additional volatility and liquidity strains. In an extreme case, market volatility could turn into market dysfunction.
In the long term, a prolonged world trade war would have serious economic consequences, she added.
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Governor Tiff Macklem told journalists that uncertainties were so great that “our analysis is not a projection, this is an assessment of vulnerabilities”.
If the trade war continues certain households, in particular those with higher debt levels, could be lacking on their payments, the bank said, the addition of the risk was mainly concentrated among households without mortgage.
This could harm a solid banking system that has built a robust liquidity base and access to funds, the BOC said.
“If credit losses occur on a sufficiently large scale, banks could reduce loans in response. Households and companies in difficulty would have less access to credit to spend difficult times. This cycle could exacerbate the economic slowdown,” he said.
The BOC also highlighted an increased risk of the hedge funds that have taken growing exposure to the obligations of the Government of Canada. In some cases, they bought almost half of all public bonds.
But a major part of their purchases is supported by debt, which makes them more likely to withdraw from the market during stress, threatening the bond market.
While interest rates began to drop in Canada last year, the overall level of household debt has dropped and the insolence between companies fell, and non -banking banks and financial institutions have increased the ability to absorb shocks.
Households with a mortgage that will renew this year or this next one are generally in a more resilient position to make payments due to the drop in interest rates, but if they are affected by job loss or loss of income, certain households could be affected.
This scenario could also be repeated among companies, said the bank, adding that those with existing vulnerabilities such as high leverage, low profitability and low cash reserves are at risk of delaying debt payments.