Bank of Canada Warns Rising Global Risks Could Trigger Financial Market Stress

The Bank of Canada said Canada’s financial system remains resilient but warned that rising geopolitical tensions, elevated market valuations, and growing hedge fund leverage could increase the risk of financial instability. In its 2026 Financial Stability Report, Senior Deputy Governor Carolyn Rogers said households and businesses have remained financially stable through a difficult year, while Canadian banks strengthened their ability to absorb shocks with higher profitability and stronger capital buffers. However, the bank warned that stock and corporate debt valuations are now high compared with historical levels, leaving markets vulnerable to a sharp correction. The central bank also raised concerns about growing global sovereign debt issuance and increased hedge fund borrowing to purchase government bonds, warning that stress in funding markets could spread quickly during periods of market turmoil. The report noted that uncertainty surrounding Canada’s trade relationship with the United States, the war in the Middle East, and emerging risks linked to artificial intelligence continue to threaten financial stability. The Bank of Canada added that highly indebted households remain vulnerable to job losses and economic shocks, although most borrowers have managed rising mortgage renewal costs better than expected.