The Canadian banking sector is heavily concentrated, reducing the risk that deposit runs at small lenders might trigger a broader crisis of confidence for the entire sector. As things stand, the chance of the Bank of Canada soon cutting interest rates – as market pricing now implies – is low. But to the extent that recent events lead to a US credit crunch, Canadian banks could be forced to tighten credit conditions as well. The main casualty would be the housing market, which has so far been insulated from the impact of higher interest rates due to lenders’ willingness to significantly extend mortgage amortisation periods.
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