Why $37.5 Billion in Impaired Loans Doesn't Worry Canada's Big Six Banks

The number shows up in quarterly earnings reports without drama. Gross impaired loans across RBC, TD, BMO, Scotiabank, CIBC, and National Bank have reached $37.5 billion as of mid-2026, nearly triple the lows seen during the pandemic stimulus period. Morningstar DBRS labels the figure "manageable." That assessment deserves unpacking, because what looks alarming in absolute terms becomes unremarkable once you see what the banks were built to withstand.

The spike is real. Stage 3 loans, assets where loss is no longer probabilistic but expected, have climbed sharply in commercial real estate and unsecured consumer credit. Office buildings in downtown cores are hemorrhaging value as hybrid work reshapes tenant demand. Credit card and auto loan defaults are rising as households exhaust the savings buffers they accumulated in 2021 and 2022. The interest rate cycle that began in March 2022 with aggressive tightening (including a historic 100-basis-point hike in July 2022) takes 12 to 24 months to fully permeate borrower balance sheets. 2026 is the realization phase.

The denominator problem

$37.5 billion is not being compared to zero. The Big Six maintain substantial balance sheets and Common Equity Tier 1 (CET1) ratios above 11.5%, well clear of regulatory minimums. The impaired loan ratio, gross impairments as a share of total loans, remains below the peaks hit during the 1990s recession, when the same banks carried worse portfolios with smaller capital cushions. The tripling language is arithmetically true but contextually misleading. You triple a number easily when the starting point was an artificial low created by government wage subsidies, payment deferrals, and a two-year freeze on normal credit discipline.

Provision for Credit Losses (PCLs) have been rising in lockstep. These are the reserves banks set aside when they expect loans to sour. The Big Six began building PCL buffers in 2023, before the migration from Stage 2 (heightened risk) to Stage 3 (default) accelerated. Analysts tracking the speed of that migration now treat it as the leading indicator of whether this becomes a solvency story or just an earnings drag. So far, it's the latter. Quarterly profits are taking hits, but no institution is approaching the capital thresholds that would trigger regulatory intervention.

The mortgage fortress holds

Residential mortgage arrears remain the outlier. National delinquency rates for mortgages 90 days or more past due are still well below 1%, a figure that puzzles observers watching other credit products deteriorate. The explanation is payment hierarchy. Canadian borrowers are skipping credit card bills, stretching auto loans, and draining retirement accounts to keep the mortgage current. Housing is protected at the expense of everything else.

That behavior creates downstream risks the $37.5 billion figure does not capture. A homeowner who is current on the mortgage but has depleted all liquid savings and maxed out unsecured credit is not delinquent by the bank's definition, but is one layoff or emergency expense away from a forced sale. Silent distress does not appear in impaired loan tallies until it breaks the surface. The decoupling of mortgage health from general credit health may be masking fragility rather than reflecting resilience.

The Office of the Superintendent of Financial Institutions (OSFI) has held capital requirements steady throughout the cycle, forcing the Big Six to prepare for exactly this scenario years in advance. The $37.5 billion in impaired loans was anticipated, modeled, and reserved against before it materialized. The regulatory framework treated the 2021-2022 environment as the anomaly and the current levels as the reversion to norm.

What analysts are watching is not whether the Big Six can absorb $37.5 billion in impairments. They can. The question is whether the figure stabilizes here or continues climbing as payment hierarchies collapse and the mortgage fortress starts to crack.