Banks Cautious but Confident as Tariff Tensions Mount
Canada’s major bank chief executives struck a measured but cautious tone at a Bay Street summit this week, saying consumers and businesses have so far demonstrated resilience in the face of the escalating Canada-U.S. trade war — even as Ottawa’s retaliatory tariffs on $28-billion worth of American imports took effect Tuesday and anxiety over potential loan defaults continues to grow. The conference, hosted by Bank of Nova Scotia, brought together the country’s top banking leaders alongside the federal banking regulator at a moment of considerable economic uncertainty.
Laurent Ferreira, chief executive of National Bank of Canada, offered one of the more direct assessments of the situation. “The current situation with the United States is not good, and we can’t be in a trade war for too long,” he said. “It’s not good for investment. It’s not good for conditions for the labour market.” His remarks captured the prevailing mood at the summit: sober acknowledgment of the risks, paired with a belief that Canadian institutions — public and private — are adapting.
Ottawa’s Engagement Welcomed by Sector
Ferreira credited the federal government’s recent pivot toward closer engagement with the business community as a meaningful and positive shift. “The shift in Ottawa has been fantastic over the past year,” he said, adding that the manner in which the government is now working with business leaders would be “a good thing for us, a good thing for the country, a good thing for banks.” He also called on Ottawa to go further, suggesting that tax regulations should be adjusted to support business growth — specifically proposing that business owners who sell assets or companies and reinvest the proceeds within Canada within twelve months should face no capital gains tax on those transactions. The idea reflects a broader industry push to unlock domestic investment and redirect capital into the productive economy.
The Regulator Opens the Door
The Office of the Superintendent of Financial Institutions (OSFI) used the summit to reinforce a signal it had already sent in June, when it reduced the size of the capital cushion Canada’s largest banks are required to hold — a move that freed up billions of dollars for increased lending to consumers and businesses. OSFI superintendent Peter Routledge made clear that the regulator views this flexibility as deliberate and strategic, designed to support federal priorities including defence spending, infrastructure investment, and artificial intelligence development.
“We’re sending a clear and unambiguous message to the banking system that you have capital planning certainty and more capital flexibility yourself to make commercial decisions — over to you,” Routledge told the conference. “From the regulator’s standpoint, wide avenue, green lights as far as you can see. Have at it.”
That posture represents a notable evolution in the relationship between Canada’s banking regulator and the institutions it oversees — one shaped, at least in part, by the pressure on Ottawa to shore up economic growth and productivity in the face of external shocks.
Capital Buffers and Credit Risk
Despite the regulator’s encouragement to deploy more capital, Canada’s largest banks are maintaining substantial buffers above the minimum thresholds. Royal Bank of Canada CEO Dave McKay said his institution is holding a common equity tier 1 (CET1) ratio of 13.5 per cent — well above OSFI’s minimum of 11 per cent — as an explicit precaution against the potential downstream effects of the trade conflict. National Bank is targeting a CET1 ratio of 13 per cent by the end of 2027, with Ferreira noting that strong capital levels provide the flexibility to respond to whatever conditions emerge.
McKay acknowledged that companies are already pulling back modestly, making more conservative decisions on borrowing and investment as the duration and ultimate severity of the trade war remain unclear. “They’re going to manage their expenses not knowing the duration of this conflict and the magnitude of the loss of those clients’ bases, and whether they can pivot their sales to another market or not,” he said. He expressed concern about the potential expansion of tariff measures, but remained emphatic that a durable long-term trade deal between Canada and the United States would serve the interests of both countries — and that American constituents are beginning to make the same case to their own elected representatives.
Loan Losses Within Expectations — For Now
Scotiabank CEO Scott Thomson offered a granular account of where stress is and is not appearing in the bank’s loan portfolio. Mortgage markets in Toronto and Vancouver are showing some strain, he acknowledged, but small business, commercial, and auto lending have not registered significant problems. When the trade war intensified last year, Scotiabank set aside additional provisions for credit losses — funds held in reserve to cover loans that may default, calculated using economic forecasting models — and Thomson said the economic deterioration to date has not approached the bank’s most pessimistic scenario.
“What happened in the macro to date hasn’t been that significant,” Thomson said. “A relatively small amount of trade is tariffs, and I don’t think that’s going to have a huge impact on the credit performance.” He was careful, however, to qualify that assessment. The trajectory of the Canada-U.S. relationship over the coming year, he said, will determine whether that confidence is warranted.
Across the sector, loan losses have remained within the range lenders anticipated when the trade conflict first escalated — a fact the bank CEOs pointed to as evidence of institutional preparedness. Whether it also reflects the early stage of a longer disruption remains, for now, an open question.
