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Canada's Big Six banks hit $37.5 billion in impaired loans, triple pre-pandemic levels
The arrears rate on the Big Six's mortgage portfolios sits near 0.24%, historically low by any measure, yet their gross impaired loans now total $37.5 billion, nearly triple the cyclical lows of 2022, according to Morningstar DBRS. The gap between those two numbers tells most of the story about what is breaking and what isn't in Canadian credit markets.
Mortgages, which represent the largest single exposure on bank balance sheets, are holding. The combination of strict underwriting standards through the stress test era and an unemployment rate of 6.4% means most borrowers are managing renewals, even when monthly payments jump 40% or more. Commercial real estate and consumer credit are where the system is showing real stress.
Where the impairments are concentrated
Office space impairments remain the dominant driver on the commercial side. Vacancy rates in major markets like Toronto and Vancouver have risen materially, and valuations on buildings financed at 2021 prices are no longer supportable at current capitalization rates. A property purchased at a 4% cap rate in 2021 and refinanced at 7% in the current market is worth roughly 40% less, even with stable rent rolls. The loss isn't hypothetical. It's recognized.
Credit cards and lines of credit account for the bulk of consumer impairments. Canadian households entered 2026 carrying $2.32 trillion in total debt. Roughly $115 billion of that is non-mortgage consumer credit. When debt service costs rise faster than wages, the payment hierarchy is predictable: mortgage first, car loan second, credit card last. IFRS 9 accounting rules require banks to book expected losses earlier than the old "wait until default" model, so some of what shows up as impaired today reflects forward estimates rather than total write-offs.
The capital buffer is working as designed
The Big Six maintain Common Equity Tier 1 ratios between 12% and 13.5%, well above the regulatory floor. OSFI's Domestic Stability Buffer, currently set at 3.5%, forces banks to hold extra capital during periods of elevated risk. That buffer exists for exactly this scenario: credit losses rising while the broader system remains stable.
The $37.5 billion figure sounds large because it is large. But relative to total loans outstanding across the Big Six, approximately $2.1 trillion as of mid-2026, the impairment rate sits around 1.8%. For context, during the 2008 financial crisis, impaired loan ratios at major Canadian banks peaked near 2.2%, and the system absorbed those losses without government capital injections.
What "manageable" actually means
Morningstar DBRS describes the current level of impairments as manageable. The banks are safe. Their capital cushions can absorb these losses without threatening depositors or requiring emergency interventions. But the households and businesses behind those impaired loans are under severe financial pressure, and the institutional stability masks that reality.
The concern is asymmetry. Five-year fixed mortgages originated in 2020 and 2021 are renewing now, through 2026 and into 2027. Payment shocks arrive in waves, with the largest cohorts hitting during 2026 and spreading into 2027. If the labor market weakens, if the unemployment rate pushes above 6.5%, the mortgage arrears that have stayed low could catch up quickly. The current impairment total would then be a floor, not a peak.
Banks are already tightening. Small business lending approvals are down, and underwriting on unsecured consumer credit has become noticeably more conservative. That behavior is rational at the individual institution level. Collectively, it reduces the flow of credit into an economy that may need it to avoid a sharper slowdown. The $37.5 billion isn't just a measure of past stress. It's shaping how much liquidity is available for the next twelve months.
The arrears rate on the Big Six's mortgage portfolios sits near 0.24%, historically low by any measure, yet their gross impaired loans now total $37.5 billion, nearly triple the cyclical lows of 2022, according to Morningstar DBRS. The gap between those two numbers tells most of the story about what is breaking and what isn't in Canadian credit markets.
Mortgages, which represent the largest single exposure on bank balance sheets, are holding. The combination of strict underwriting standards through the stress test era and an unemployment rate of 6.4% means most borrowers are managing renewals, even when monthly payments jump 40% or more. Commercial real estate and consumer credit are where the system is showing real stress.
Where the impairments are concentrated
Office space impairments remain the dominant driver on the commercial side. Vacancy rates in major markets like Toronto and Vancouver have risen materially, and valuations on buildings financed at 2021 prices are no longer supportable at current capitalization rates. A property purchased at a 4% cap rate in 2021 and refinanced at 7% in the current market is worth roughly 40% less, even with stable rent rolls. The loss isn't hypothetical. It's recognized.
Credit cards and lines of credit account for the bulk of consumer impairments. Canadian households entered 2026 carrying $2.32 trillion in total debt. Roughly $115 billion of that is non-mortgage consumer credit. When debt service costs rise faster than wages, the payment hierarchy is predictable: mortgage first, car loan second, credit card last. IFRS 9 accounting rules require banks to book expected losses earlier than the old "wait until default" model, so some of what shows up as impaired today reflects forward estimates rather than total write-offs.
The capital buffer is working as designed
The Big Six maintain Common Equity Tier 1 ratios between 12% and 13.5%, well above the regulatory floor. OSFI's Domestic Stability Buffer, currently set at 3.5%, forces banks to hold extra capital during periods of elevated risk. That buffer exists for exactly this scenario: credit losses rising while the broader system remains stable.
The $37.5 billion figure sounds large because it is large. But relative to total loans outstanding across the Big Six, approximately $2.1 trillion as of mid-2026, the impairment rate sits around 1.8%. For context, during the 2008 financial crisis, impaired loan ratios at major Canadian banks peaked near 2.2%, and the system absorbed those losses without government capital injections.
What "manageable" actually means
Morningstar DBRS describes the current level of impairments as manageable. The banks are safe. Their capital cushions can absorb these losses without threatening depositors or requiring emergency interventions. But the households and businesses behind those impaired loans are under severe financial pressure, and the institutional stability masks that reality.
The concern is asymmetry. Five-year fixed mortgages originated in 2020 and 2021 are renewing now, through 2026 and into 2027. Payment shocks arrive in waves, with the largest cohorts hitting during 2026 and spreading into 2027. If the labor market weakens, if the unemployment rate pushes above 6.5%, the mortgage arrears that have stayed low could catch up quickly. The current impairment total would then be a floor, not a peak.
Banks are already tightening. Small business lending approvals are down, and underwriting on unsecured consumer credit has become noticeably more conservative. That behavior is rational at the individual institution level. Collectively, it reduces the flow of credit into an economy that may need it to avoid a sharper slowdown. The $37.5 billion isn't just a measure of past stress. It's shaping how much liquidity is available for the next twelve months.
Sources
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