The head of the Office of the Superintendent of Financial Institutions (OSFI) stresses that Canada’s banking regulators are focusing on ensuring prudent lending practices amid debates over whether the Canadian housing market is overheated.
Speaking to a conference hosted by the Canadian Association of Accredited Mortgage Professionals (CAAMP) on Monday in Toronto, Julie Dickson, Superintendent of Financial Institutions, suggested that all Canadians have an interest in ensuring that bank lending is prudent.
“Everyone wants to know whether markets are balanced or in a bubble, whether rules will be changed, what will happen when interest rates rise, and what could cause the market to fall. This is understandable, given that housing touches all Canadians: those with houses, those who want to buy a house, those who work in industries that are supported by strong housing markets (such as hardware stores, renovation companies, and mortgage brokers). Even those who have no direct interest understand that housing markets can have profound implications for the economy, which affects everyone,” she said.
Dickson stressed that OSFI doesn’t make predictions about the housing market, nor does it try to forecast market bubbles. “This is primarily because history has shown it is difficult to determine whether a bubble in any market exists, what the size of that bubble might be, or the consequences of it bursting,” she said. “Because bubbles are so difficult to identify, by taking a position one way or the other, OSFI could either provide positive reinforcement to banks to lend more (which could make a bubble bigger) or create an unnecessary slowdown in lending by banks. OSFI’s role is more about prevention, and ensuring that banks are prepared for the unexpected.”
To that end, OSFI focuses on ensuring that they follow prudent mortgage lending practices. “Prudent lending practices should not change over time. There are long-held principles governing prudent lending,” Dickson said. “While innovation is welcome, only very carefully should banks step away from traditional prudential practices.”
“The basics are not rocket science. But time and again, it is by ignoring the basics that banks get into trouble,” Dickson noted. “Indeed, while many observers have suggested the global financial crisis was caused by complex products and banks going beyond traditional lending, in fact major problems within traditional lending were a source of the problem — namely, unsound mortgage underwriting.”
Dickson recalled that OSFI looked at whether any changes to its prudent lending guidelines were necessary earlier this year. “We decided that no changes were needed at that time. However, we continue to closely monitor real estate lending, including seeking additional information to better understand what major financial institutions are doing,” she said, adding that any future changes would involve public consultations.
She did say that OSFI is also working on a guideline for mortgage insurers and how they interact with mortgage lenders. OSFI expects to issue the draft of that guideline for public consultation by the end of March 2014.