Macro-Financial Spillovers to Canada U.S. Rate Shocks, Housing Leverage, and Bank Stability Channels

This study examines how U.S. monetary policy shocks are transmitted to the Canadian financial system, with particular emphasis on housing leverage and banking-sector stability. monetary policy shocks to the Canadian financial system, with particular emphasis on housing leverage and banking-sector stability. Using a macro-financial framework, the paper analyses how U.S. interest rate increases propagate through cross-border financial linkages, affect household balance sheets, and influence Canadian banks’ risk exposure. The analysis combines macroeconomic indicators, housing market leverage metrics, and bank-level stability measures to find the most important spillover channels. Empirical evidence suggests that elevated household indebtedness amplifies external monetary shocks, increasing vulnerability within the banking sector through credit quality deterioration and funding cost pressures. The findings highlight the critical role of macroprudential regulation in mitigating spillover risks and preserving financial stability in small, open economies closely integrated with the U.S. financial markets. Policy implications are discussed in the context of coordinated monetary and macroprudential responses.