Canadian Banks Safe and Sound, Housing Poses Risks

  • Six banks dominate with 93% of total assets
  • Stress tests show banks are resilient, well capitalized
  • Single body needed for ‘bird’s eye view’ of financial risks
  • The country’s housing market is a potential risk to financial stability; but the country’s government backed mortgage insurance scheme would cushion any initial blow dealt by a crisis, according to the IMF’s latest assessment of the country’s financial sector.

    The report says the household debt-to income ratio has surged in recent years, in large part related to high house prices in some areas, and this makes the economy more vulnerable in the event of a shock. Mortgages and consumer loans secured by real estate represent the single largest asset group for Canadian banks. One third of all non-performing loans are mortgages.

    The IMF also released its annual check-up of Canada’s economy, which is expected to grow 2¼ percent in 2014.

    Reduce risk to taxpayers

    The government has taken steps to impose limits on government-backed mortgage insurance, and the IMF said the government could do more to limit the risk to taxpayers. Two measures in particular would help:

    • Give the main financial supervisor full regulatory authority over the government’s housing mortgage insurance body

    • Provide common guidelines for mortgage insurance

    Six federally-regulated banks hold 93 percent of bank assets—a relatively high concentration in comparison to countries such as the United Kingdom.

    The federal authorities regulate the majority of the financial sector, though a significant segment comes under provincial regulations. The IMF said the framework for regulation and oversight is current with international standards, and is well coordinated across the different federal oversight bodies. But Canada lacks a single regulator to keep an eye on risks to the financial system as a whole.

    “The Canadian financial system has performed remarkably well over the years. This reflects a combination of a conservative approach to banking, effective regulation and supervision by a regulator which keeps close to its market, and good coordination between the federal authorities. Our recommendations aim at ‘future-proofing’ the system, rather than suggesting any fundamental changes. One of the gaps that we identify is that no entity or forum has the mandate or membership that can allow for a complete, bird’s eye view of the system to cover all institutions and markets across the federal and provincial remit,” said Aditya...

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