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Canadian Banks Undergo a Stress Test

22 May 2012

A Fitch Ratings’ special report titled “Evaluating Canadian Banks’ Residential Mortgage Exposure” was released yesterday and in it, the global rating agency placed Canada’s Big Six banks under a stress test to see how they are doing, and how they will do in the near future, when it comes to residential mortgages. After the stress test, it’s clear that mortgage loans are the biggest risk to Canadian banks. And some more than others.

During the stress test, Fitch took losses of one per cent to ten per cent and applied them to residential mortgages and 2nd mortgages such as HELOCs and applied them over a span of three years. After the test it showed that total gross losses for the banks were within the range of $9.1 billion – $91.3 billion. After factoring in mortgage insurance, the banks would have total net losses of $4.1 billion – $41.5 billion.

The report showed that the Canadian Imperial Bank of Commerce (CIBC) and Royal Bank of Canada (RBC) hold the most risk in terms of how much they are lending; and RBC has some of the lowest mortgage insurance rates – meaning that they would not be as protected as the other banks. Bank of Montreal (BMO) was shown to have the least amount of mortgages when compared with their overall lending, while TD (Toronto-Dominion Bank,) uses the most insurance, meaning that they have the most protection should borrowers default on their loans.

As of January 2012, the Big Six in Canada had a total of $912 billion in mortgage lending through both residential mortgages (which totaled $730 billion,) and in HELOCs (totaling $182 billion.) The stress test was done by Fitch after mounting concern surrounding Canada’s banks, and Canada mortgages, grew and household debt levels started to climb. The global agency realizes that it’s our incredibly low interest rates that are fueling the demand for mortgages and home loans.

The numbers are definitely worrisome, especially considering all the hype and panic that has been surrounding the Canadian mortgage and housing industry lately; and it could lead to proposed changes in Ottawa actually taking effect – some of those changes being good, and some not as much.

For the full Fitch Ratings report, you can check out their website at

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