COVID‑19 is an unprecedented shock for the Canadian economy. Households, businesses and governments need a well-functioning financial system to manage the effects of the pandemic and support a robust recovery. In this Financial System Review, we identify the effects on financial stability and explain how recent actions by the Bank of Canada and other policy-makers help Canadians through a very challenging time.
Uncertainty has led to widespread financial stress
COVID‑19 is a severe health threat, and the necessary measures taken to contain its spread have cut economic activity. Canada is also grappling with the plunge in global oil prices, which hit while many businesses in the energy sector were still recovering from the 2014–16 oil price shock.
Early on, uncertainty about just how bad things could get created shock waves in financial markets, leading to a widespread flight to cash and difficulty selling assets. Policy actions are working to:
- restore market functioning
- ensure that financial institutions have adequate liquidity
- give Canadian households and businesses access to the credit they need
Putting a floor under the economy
Since the onset of the pandemic, the Bank has established and expanded a range of facilities and purchase programs to address problems with market functioning and confidence. They are showing signs of succeeding:
- Access to liquidity has greatly improved in key financial markets that had been showing signs of significant stress.
- Many of the programs are now being used less than they were at inception.
Weathering the effects of containment measures
COVID‑19 has hit many households and businesses hard, especially those that are highly indebted or have low cash buffers. Strong and targeted policy responses by governments, regulators and the Bank are supporting the Canadian financial system. During this period, emergency measures that provide basic incomes to households and help businesses access credit are crucial.
For its part, the Bank has taken action by:
- lowering the policy rate to 0.25 percent
- supporting the flow of credit to households and businesses
- strengthening the transmission of monetary policy so that lower policy rates can be passed through to borrowers
We will continue to assess the impacts of these measures and can adjust the scale of these programs as market conditions change.
Our goal in the short-term is to help Canadian households and businesses bridge the crisis period. Our longer-term goal is to provide a strong foundation for a recovery in jobs and growth.”
Policies are helping the financial system absorb the shock
The financial system provides the credit, liquidity, and payment and settlement services necessary to address the economic impacts of COVID‑19 and facilitate the recovery. Canada’s key financial institutions are strong enough to deal with these challenging conditions, including operational disruptions.
Canada’s six largest banks have strong capital and liquidity buffers, diversified assets and the protection of a robust mortgage insurance system. Bank staff analyzed two scenarios. The first shows that a aggressive policy response has helped put the banks in a good position to manage the consequences of the shock. The second shows that without these policies, banks would be faring much worse, with important negative effects on the availability of credit to households and businesses.
Many paths to the recovery are possible, as illustrated in the April Monetary Policy Report. Policy support will need to be flexible and adapt as the situation evolves.
We entered this global health crisis with a strong economy and resilient financial system. This will support the recovery. But we know that debt levels are going to rise, so the right combination of economic policies will be important too.”
The Financial System Review is a product of the Governing Council of the Bank of Canada: Stephen S. Poloz, Carolyn A. Wilkins, Timothy Lane, Lawrence Schembri, Paul Beaudry and Toni Gravelle.