4  BIS Review 160/2008  In Canada, our banks are not facing the same pressures to de-lever as their counterparts abroad. Still, their loan portfolios would experience higher credit losses in a deep or prolonged downturn.
The risk identified in the FSR is that market forces could compel banks to maintain higher capital ratios than necessary to guard against the possibility of worse economic outcome. This could lead banks to slow balance sheet growth, which would tighten lending conditions for both households and businesses and weaken the economy. Ultimately, the financial institutions themselves would suffer from this self-fulfilling prophecy.