OTTAWA – Canada should consider using new tools to control the high level of household debt, which is one of two big threats to the country’s financial system, the G20’s Financial Stability Board (FSB) said in a report on Monday.
The FSB, chaired by Bank of Canada Governor Mark Carney, has been tasked by the Group of 20 top world economies to implement new banking rules aimed at preventing more bailouts such as those spurred by the 2008 financial crisis.
The report, a review by Canada’s peer countries of its progress in implementing such reforms, gives the country good marks for its resilient banks, which withstood the financial crisis, and a regulatory system that provides lessons for others.
“Such performance, however, must not breed complacency as the post-crisis period presents a number of challenges,” the report said.
The two main threats to Canada are its exposure to “adverse global economic developments” and the increasing indebtedness of households, it said.
On the debt issue, it said: “Given recent global market developments, it is important for the authorities to continue to strengthen macroprudential surveillance and consider expanding the range of tools at their disposal - which currently include the leverage ratio and various government mortgage insurance eligibility requirements - in order to effectively address any emerging concerns.”
The report did not prescribe any specific action to rein in mortgage debt.
The issue is not new to Canadians. Carney and Finance Minister Jim Flaherty have warned consumers repeatedly against taking on too much debt at a time of historically low interest rates. The household debt-to-income ratio has reached a record high of more than 150% and the FSB said the price-to-income ratio in the housing market is at a 30-year high.
Since 2008, Flaherty has intervened three times to slow the real estate market. He has lowered the maximum amortization period for new mortgages to 30 years from 40 years, raised minimum down payments required to qualify for government insurance, and required all borrowers to qualify for a five-year fixed-rate mortgage to get insurance, even if they chose another mortgage option.
The FSB urged the government to closely monitor the Canada Mortgage and Housing Corp (CMHC), the federal agency that backstops many high-risk mortgages, to ensure its liabilities are manageable. CMHC is not regulated by the banking regulator but complies with the same rules as the insurance industry.
“It is therefore important that the Canadian authorities continue to closely assess the contingent liability to the public finances posed by CMHC and ensure that its underwriting standards remain appropriate,” the report said.
The peer review of Canada is the first of its kind and is a follow-up to recommendations made to the country by the International Monetary Fund in 2007-08. The FSB has conducted similar reviews of five other countries, including Switzerland this month.
Canada is well placed to implement the G20 reform agenda. Its banks are already capitalized at levels above their international peers and the country’s big six banks are expected to implement the new Basel III capital requirements in 2013.
The FSB noted “good progress” by banking regulator OSFI on recommendations related to banking supervision, stress testing and early intervention in troubled banks. It also lauded improvements made to the structured finance market after the 2007 crisis in the market for nonbank asset-backed commercial paper and efforts to strengthen securities settlement systems.
On securities regulation, it endorsed Flaherty’s ambition to create a national securities regulator despite a major roadblock caused by an adverse Supreme Court ruling in December.