When five-year mortgages are reset, the banks reputation will be tested.
The financial district of Toronto has bank and office towers.
The photo was taken by Peter J. Thompson.
The head of Canada's federal banking regulator said a decade of tightening the screws has left the financial system ready for higher interest rates.
The system can absorb it, according to Peter Routledge, the financial institution's administrator.
Nature can come back to haunt Assertions of that nature can come back to haunt. Budgets balance themselves, or inflation is fleeting.
The Office of the Supremo of Financial Institutions (OSFI), which oversees some 350 lenders, trusts, asked a question about inflation and the Bank of Canada's march to a more normal interest rate setting.
The central bank raised its benchmark interest-rate a half point last month, and the governor indicated during testimony at the House finance committee on April 25 that he and his deputy probably will execute another half-point increase at their next policy announcement on June 1. Macklem has said on numerous occasions in recent weeks that getting inflation under control could require pushing the rate past three per cent.
Macklem said that the Canadian economy is in good shape. It needs higher interest rates.
Canada's reputation for fostering bullet-proof banks will be tested in the months ahead. Over the past 13 years, nearly 500 American lenders have collapsed, while no Canadian financial institution has failed. The years that preceded the Great Recession were when Canadian lenders were more interested in real estate.
Many first-time borrowers will have no idea how much debt service costs will be when their five-year mortgages reset because of the low interest rates. There is a chance of a financial crisis if delinquencies spike. Domestic consumption is less violent as households are forced to commit a greater amount of their disposable income to mortgage payments. Both scenarios could cause a recession.
There are homes in Toronto.
James MacDonald took the photo.
Consumer spending and some sectors of housing investment will face some important headwinds in the coming years, according to a report last month. For the overall growth outlook, the question is whether business investment and exports can grow enough to compensate for the weakness.
It shouldn't be confused with complacency, as the financial system will remain a firewall against worst-case scenarios.
He said during the interview that he agrees with former Bank of Canada governor Stephen Poloz, who said that people still worry about high debt levels because of attitudes that haven't changed since the Great Depression.
He was unwilling to let down his guard on the basis of a theory, no matter how persuasive it might sound.
OSFI's job is to keep banks and insurers out of trouble. The way in which it approaches regulation has something to do with its clean sheet when it comes to bankruptcies. The former chair of the Federal Reserve assumed that banks could be trusted to regulate themselves. OSFI was never influenced by that philosophy. It has guidelines that allow it to be as specific as necessary.
The stress test that borrowers must pass before they can get an insured mortgage is one of the rule changes that result from the principles-based approach to regulation. You could argue that the stress test should have been applied sooner, as regulation has been a couple of steps behind throughout the era of ultra-low interest rates. The finance minister, a member of Parliament from the Greater Toronto Area, would have had to make that call. OSFI is not a macro-prudential regulator. The stress test was issued when it was determined that the lenders it oversees were becoming too loose with their definitions of who should qualify for a mortgage.
For years, the most fatalistic observers of the Canadian housing scene have been pointing out how Canada's household debt levels mirror those of the U.S. before that country's real-estate bust triggered the financial crisis. He doesn't mind alarmism because it keeps people alert to what could go wrong. The charts show the disaster in Canada. As long as immigration rates exceed the pace at which we are building new homes, the housing markets will remain robust. The mortgage stress test is an important difference.
The difference between 2008 in the United States and 2022 in Canada has been tightened. Through the boom years, we tightened our standards. They loosened them in the United States.
Policymakers and regulators learn from their mistakes. The Great Recession gave many lessons to people who weren't directly involved. Staying awake is a learning for Routledge. Ensuring banks are ready of cyber attacks and adjusting to ensure increasing competition for financial technology companies are some of the newer issues on OSFI's agenda. OSFI is studying whether the stress test should be expanded to include combined loan products that are based on a borrowers home loan.
"You never want to say, "All clear"," he said.
Email: kcarmichael@postmedia.com
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