If you get into a comfort zone, which I describe as
complacency, that’s not a good idea
Canadian banks, ranked the soundest by the World Economic
Forum, can withstand major economic disruptions because they moved more quickly
than their competitors to raise capital buffers, the country’s banking
regulator said.
“They could withstand a lot of pain, in part because
we’ve kept the capital requirements high,” Julie Dickson said in an interview
from her office in Ottawa. “They are extremely well situated and certainly even
stronger than they were going into the crisis in 2008.”
Dickson, head of the Office of the Superintendent of
Financial Institutions, said she hasn’t noticed any signs that creditworthiness
of the nation’s banks has diminished in recent months as concerns mounted over
the European debt crisis and signs of weakness in the U.S. economy grew.
The regulator played a role in keeping the country’s
financial system strong, requiring banks to hold a higher level of capital than
stipulated by the Basel Committee on Banking Supervision, an arm of the Bank
for International Settlements, based in Basel, Switzerland.
The committee has urged global banks to start
implementing by January measures known as Basel III that raises capital
requirements, and to finish implementing the standards by 2019. Dickson has
asked Canadian banks to meet the 2019 goal next year.
The steps help further buffer a banking industry that
recorded a fraction of the writedowns taken by lenders and brokers worldwide
during the financial crisis.
Canadian banks held four of the top 10 spots in Bloomberg
Markets magazine’s annual ranking of the world’s strongest banks, released in
May. Canadian Imperial Bank of Commerce placed third, followed by
Toronto-Dominion Bank in fourth, National Bank of Canada in fifth and Royal
Bank of Canada in sixth.
Dickson said her concern is complacency.
“If you get into a comfort zone, which I describe as
complacency, that’s not a good idea,” Dickson said.
The biggest risk to the country’s financial system right
now is growing household debt, said Dickson, adding Finance Minister Jim
Flaherty’s efforts to tighten mortgage rules will help manage the problem even
if it slows growth.
Flaherty implemented changes on July 9 including
shortening the maximum length of government-insured mortgages to 25 years from
30 years to quell demand for homes.
Market Impact
The new mortgage rules, coupled with steps taken by the
banking regulator to tighten mortgage lending standards, have the same impact
in the real estate market as a 1.5 to 2 percentage-point increase in interest
rates, said David Tulk, chief Canada macro strategist at TD Securities in
Toronto. The changes will reduce growth by 0.1 percentage points this year and
0.2 points in 2013, Tulk said.
The regulator released guidelines on mortgage lending
last month that will require lenders to limit the size of loans secured by
their homes, take “reasonable steps” to verify borrowers’ incomes and establish
standards for acceptable levels of consumer debt. Banks are supposed to
implement the new rules by the end of the current fiscal year.
“The way to look at that is short-term pain for long-term
gain,” Dickson said, adding she’s more concerned about the impact highly
indebted households could have on the economy than bank solvency. “When it
comes to the Canadian housing market, the bigger issue there is the impact on
individual Canadians. The banks can withstand a lot.”
Unknown Crisis
While there is a lot of experience dealing with the
impact of housing market corrections, Europe’s crisis poses more of an unknown
for Canada’s banking sector, she said.
“They can withstand a lot of pain but it is very
difficult to quantify the kind of stress” that may occur in Europe, Dickson
said. “They are extremely well situated to handle any major disruption and
certainly this European thing has been there with us for a few years now so
people have had a lot of time to think through this.”
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