Julie Dickson, Canada’s bop banking regulator, says her organization is generally comfortable with the capital charges banks are taking for their uninsured mortgages.
In a speech to an industry conference Tuesday in Toronto, Dickson, who heads the Ottawa-based Office of the Superintendent of Financial Institutions Canada (OSFI), noted that OSFI is very focused on the banks response to the current market environment of prolonged low interest rates, which may push firms to take on more risk in a search for yield, and encourages borrowers to increase leverage.
In particular, these concerns are manifest in the Canadian real estate market. In response, Dickson noted that OSFI has been conducting major reviews of banks’ mortgage portfolios; that it issued guidance on prudent residential mortgage lending; and that it has been reviewing the models used by banks to calculate capital charges for the uninsured portion of their mortgage portfolios. And, she said that it “generally believe[s] that the models are producing reasonable results.”
This regulatory attention, coupled with measures by the Department of Finance to restrict mortgage insurance have led to “some welcome changes in the market,” she said, including slower growth in household credit, and a more balanced picture overall.
“We continue to monitor the mortgage market and watch the effects of the changes that have been made in this area. We also look ahead at other issues that may develop,” she said.
Additionally, Dickson defended OSFI’s early implementation of the new Basel III capital regime in Canada, noting that allowing weak banking systems can “wreak havoc on economies and governments.”
She said that OSFI required immediate implementation of Basel III beginning in 2013, and did not allow a gradual phase-in until 2019, which is what some other jurisdictions have allowed, for several reasons. For one, “the current global economic environment is not comforting”, she said. “When in unchartered waters, you do not want to test whether the boat is sound enough. We need to be prepared in the event of serious downside risks materializing.”
Additionally, numerous other countries, including Australia, Singapore, Switzerland and China, have adopted requirements that are in some areas, higher than Basel III dictates. And, it expects the U.S. and Europe to fully implement the accord too. “Our best information at this point is that the U.S. and the European Union will implement Basel III – although, as usual, the devil will be in the details,” she said.
Moreover, it hopes to maintain Canada’s reputation for financial stability. “Strong regulation and supervision can be reflected in better ratings, and better ratings can allow for cheaper funding,” she noted. “From this perspective, strong supervision impacts the bottom line of a financial institution in a positive way. It does not limit opportunities; it expands them.”