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Regulator calls for vigilance by Canada’s banks and mortgage insurers

The Deputy in the Office of the Superintendent of Financial Institutions, the regulating body that oversees Canada’s banks, issued a call for vigilance and caution to the country’s banks and mortgage insurers, saying that while they are solid and sound, no one should be complacent. The lending environment today is riskier than ever, and the banks and the mortgage insurers have to be responsible for the mortgages they lend and insure. Mark Zelmer spoke at a C.D. Howe Institute Housing Policy Conference in Toronto today.

Reminding attendees at the conference that Canada has experienced real estate “corrections” in the early 1980s and again in the 1990s, he said that the lending environment today is riskier now than it was in those years, due mainly to the record-high levels of household indebtedness. Most of that indebtedness is in the form of mortgages. People are taking advantage of the persistently low interest rates to “leverage up and buy homes, investment properties for rental income, autos and other goods and services.”

The higher level of indebtedness means that those borrowers are less able now to absorb “major shocks” than they would have been in the past. The fact that housing prices are also at record high levels only adds to the risk, Zelmer said.

At the end of the day, mortgage lenders and insurers must accept that they are responsible for the loans they are granting and insuring, and thus the risks they are running. After all, they are the ones that willingly granted the loans and insurance in the first place.

Mark Zelmer, Office of the Superintendent of Financial Institutions

Banks are capitalized well above international minimum standards

Canada’s banks are in a good position of strength regarding capitalization and liquidity, however, and are capable of withstanding a “significant downturn” in the housing sector and the larger economy. Indeed, it would take several years of continued severe losses, and no mitigating actions taken by the banks, before they would “burn through the cushions” of capitalization they now carry.

What more can the banks do? Zelmer says they should promote “strong governance and risk management conrols” around mortgage lending and insuring. They should resist the “siren song” of market share and not ease their lending practices. It is up to them to accept responsibility for the loans they grant because they are best qualified, and staffed, to do so. The OSFI can’t do the work for them, nor should it. OSFI is, however, “on the case.” Anong other steps, the regulator has “combed through” mortgage portfolios to test the quality of the underwriting, issued guidelines on mortgage insurance, and required that lending institutions disclose more data regarding the loans they make.

Ultimately, though, it’s up to the banks themselves.

“For one thing, we do not employ thousands of people,” Zelmer said.

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