The forthcoming changes to bank capital requirements to account for their exposure to Canada’s frothy housing markets will be targeted based on housing prices, debt levels, and geography, says a top banking regulator.
Speaking to an industry conference in Toronto on Tuesday, Mark Zelmer, deputy superintendent., Office of the Superintendent of Financial Institutions (OSFI), shed some light on OSFI’s plans for changes to bank capital requirements, which were announced late last year.
See: Feds and regulators take step to limit housing market risks
Zelmer said that the revised requirements will be tied to housing prices and household debt levels “in a surgical fashion”.
The premise behind the planned changes is that the value of the collateral underpinning residential mortgages “is likely to be less certain in situations where housing prices are unusually high relative to household income, or where housing prices have appreciated significantly in preceding years,” Zelmer said.
To ensure greater conservatism in assessing potential losses in these conditions, OSFI will require banks to boost their capital to account for these exposures. These requirements will vary over time, “depending on the behaviour of housing prices both over time and relative to household income,” he said. “It will also vary across regions in Canada given that housing markets across Canada are inherently local in nature and rarely move in tandem given the different economic cycles across the country.”
“We believe this is a measured and proactive response that will help ensure our regulatory capital requirements keep pace with the ebb and flow of vulnerabilities in the financial system,” Zelmer said, adding that more details will become available in the coming months when OSFI begins the public consultation process.
In his speech, Zelmer also noted that 2016 will mark the final chapter in the development of the revised global capital regime known as Basel III, which will likely to continue ratcheting up banks’ capital requirements. “We are not looking to foster a general increase in capital requirements this time around. Instead, most of the increases in capital requirements are likely to show up at some banks, or in some risk exposures, where current risk weights are too low,” he said.
In the next few months, proposed revisions to the models-based credit risk framework will be released, Zelmer said, noting that the new capital framework for the trading book was finalized over the weekend and will be published shortly. In addition, new rules for the operational risk framework are likely to be issued for a second consultation before spring; the leverage ratio requirements are to be finalized by the end of the year; and, additional disclosure requirements are also in the offing, he said.
Zelmer also outlined OSFI’s efforts to promote the viability of banks in times of stress, and its work to ensure a more tailored approach for smaller, less complex institutions