Banking watchdog boosts scrutiny of consumer loans

Summary:
Canada’s banking regulator is increasing its scrutiny of loans made to consumers especially mortgages.

Amid rising concern about record household debt levels, the Office of the Superintendent of Financial Institutions is “stepping in to increase [its] monitoring” of consumer loans made by the major banks, said the head of the organization.

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John Greenwood Sep 26, 2011 – 10:27 AM ET | Last Updated: Sep 26, 2011 1:38 PM ET

Canada’s banking regulator is increasing its scrutiny of loans made to consumers especially mortgages.

Amid rising concern about record household debt levels, the Office of the Superintendent of Financial Institutions is “stepping in to increase [its] monitoring” of consumer loans made by the major banks, said the head of the organization.

Speaking to reporters in Toronto, Julie Dickson said recent moves by the government to tighten mortgage rules had a positive impact and that insured consumer home loans are not growing as fast as they were. However, Ms. Dickson said lenders also need to keep an eye on their uninsured mortgages which make up the lion’s share of their home loan portfolios and which would be also be impacted in the even of a market downturn.

In a speech to business leaders the same day, she said the Financial Stability Board, an international body created by the G20 to promote financial stability, is also looking at mortgage lending in connection with an effort to develop principles for safe mortgage lending.

A central concern in both the United States and Canada is that the low interest rate environment — expected to remain in place until at least 2013 — “has likely increased the incentive for consumers… to borrow,” Ms. Dickson said in her address. “Banks also have an incentive to lend.”

Ms. Dickson also noted that in the face of intense competition in the financial sector there is concern that banks may lower their lending standards. She advised lenders to “guard against loosening historical underwriting standards — for example by moving to higher loan-to-value ratios or waiving any due diligence requirements.”

Regarding OFSI’s participation in the international effort to beef up financial regulations she said there will likely be a decision to publish a list of so-called too-big-to-fail banks later this year, but that no Canadian banks are likely to make the cut.

Currently there are 28 institutions being considered “but the list is not static,” she said.

Under proposals put forward by the Basel Committee on Banking Supervision, banks identified as being systemically important would be required to hold more capital than their peers, but that plan is attracting fierce opposition from the financial industry where players worry that the move would leave them less competitive.

JPMorgan Chase chief executive Jamie Dimon, who recently called the Basel rules “anti-American”, reportedly targetted Mark Carney, Governor of the Bank of Canada, in a diatribe about the new regulations in a private meeting on Friday.

Posted in: Financial Services News Tags: Banks, Canada, Julie Dickson, Mortgages, Office Of The Superintendent Of Financial Institutions