Highlights From Financial System Review

• Proactive steps but some way to go: “Canada’s financial system remains resilient […] Households, businesses, banks and other financial institutions have taken proactive steps to adjust to higher interest rates and to weather economic shocks," […] "This adjustment still has some way to go and continues to present risks to financial stability.
• Renters under greater pressure: “Signs of stress are concentrated primarily among households without a mortgage and survey data suggest that, of these households, renters are most affected. In contrast, indicators of stress among mortgage holders are largely unchanged, remaining at levels lower than their historical averages.”
• “Factors such as income growth, accumulated savings and reduced discretionary spending are supporting households’ ability to deal with higher debt payments.”
• Stretched valuations: “The valuations of some financial assets appear to have become stretched, which increases the risk of a sharp correction that can generate system-wide stress. The recent rise in leverage in the non-bank financial intermediation sector could amplify the effects of such a correction.”
• Increased hedge fund refinancing risks: “Leverage obtained by asset managers through borrowing in the repo market increased by around 30% in the past 12 months.” This was driven by hedge funds (75%) and pension funds (14%). Hedge funds have high refinancing risk with about 70% of repo exposure under one week. Further, the report notes that “Some individual repo positions held by hedge funds are also very large and highly concentrated—for example, in a single Government of Canada bond.”
• Recall that the BoC has previously attributed the growing popularity of the basis trade by hedge funds to CORRA trading above the overnight target through late 2023/early 2024 rather than being down to QT.

Source: Bank of Canada FSR