In a speech given November 7, Bank of Canada governor, Mark Carney highlighted “a well-regulated mortgage market” and “a limited shadow banking system” as key factors that helped Canada weather the economic firestorm in 2008/2009 that hobbled the economies of the U.S. and many other developed countries.
“The success of the Canadian financial system,” Mr. Carney told his audience, “was the product of strong macroeconomic fundamentals and sound risk management by the banks themselves, underpinned by an effective regulatory and supervisory regime.” In particular, he pointed out that consolidated regulatory supervision focused on prudential supervision (rather than concentrating just on capital requirements) “and was not burdened by other objectives such as the promotion of home ownership and community development.” He also noted that the liquidity tests of Canadian bank regulators were “equally applied to banking and investment banking operations,” which effectively stopped banks from engaging in regulatory arbitrage by switching risky lending from one bank division to another.
“Common-sense attributes” which shielded Canadian mortgage markets from the worst of the U.S. sub-prime mortgage meltdown included “mortgagors being personally liable for their debts and mortgage interest not being tax-deductible,” Mr. Carney noted – mortgage deductibility being a ‘sacred cow’ of U.S. tax policy.
In addition to stricter interest tests and mortgage insurance premiums geared to loan-to-value ratios and amortization periods, Mr. Carney also specifically noted that, unlike the situation in the U.S., “most mortgages originated by banks were for their own balance sheets” which promoted stricter underwriting standards. Also, he pointed out, Canadian Banks, rather than being pressured to securitize and sell off individual mortgages, “obtained natural geographic diversification of their loan portfolios through their nationwide branch system, which eliminated one motivation for securitization.”
In his speech, Mr. Carney highlighted the key points that differentiated Canadian banking and mortgage markets from their U.S. and other G20 counterparts. The built-in robustness engendered by stricter regulatory standards and supervision is a main reason why Canadian mortgage markets (and housing markets in general) have not suffered the abrupt contractions experienced in the United States.
