Canada’s top bank regulator is proposing changes to the amount of capital the country’s biggest financials institutions must hold against residential mortgages to keep up with the rapid rise of house prices and highly leveraged buyers in some markets.
The proposed revisions first discussed by the Office of the Superintendent of Financial Institutions in December — in tandem with federal changes to down payment levels for certain home purchases relying on government-backed mortgage insurance — are to become effective in November following a public comment period.
“These updates will ensure that capital requirements remain prudent in periods where house prices are high relative to household income and/or house prices are increasing rapidly,” OSFI said in a statement Friday.
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Among the proposals is the introduction of a “risk-sensitive floor” on internal capital requirements to account for periods when the value of properties pledged as collateral becomes “less certain,” OSFI said. This new floor would have to be included in the banks’ estimates of loss in the event of a default.
Canada’s biggest banks would have to calculate higher capital for mortgages in 11 cities, including Vancouver and Toronto, when there are signs of overvaluation, said Jason Mercer, an assistant vice-president in the financial institutions group at Moody’s Investors Service.
The other affected cities are: Victoria, Calgary, Edmonton, Winnipeg, Hamilton, Ottawa-Gatineau, Montreal, Quebec City, and Halifax.
“OSFI is telling banks hold more capital against mortgages in these cities to add some protection from housing over-valuation in the event of a housing downturn,” Mercer said.
“This will increase the bank’s funding costs for mortgages which they could then pass along to customers, but its difficult to say how that would happen at this point.”
As a result, it is difficult to predict whether the new capital requirements for banks will contribute to a cooling of the housing market in the hottest spots, such as Vancouver and Toronto.
The new capital requirements, once adopted, would apply to deposit-taking institutions that are permitted to use internal models for loans secured by real estate. These include Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada, and HSBC Canada.
“These updates provide a measured and forward-looking response to the changing risks occurring in the Canadian mortgage market,” OSFI said in Friday’s statement.