A greater unease has settled among industry players as lender Home Capital continues to struggle with rapidly depleting deposits, which declined by around $600 million so far this month (from approximately $13.5 billion at the end of April 2017).
Market observers noted that the alternative lender’s situation is exhibiting remarkable similarities with that of U.S. subprime lender New Century, which encountered significant problems around a year and a half before the 2008 collapse of several major financial institutions.
“Regulators have their heads in the sand,” veteran short-seller Marc Cohodes told the Financial Times. “They should have said, ‘these guys are done, the big banks will pick up the slack, we’ve got rid of a bad actor’. Instead, they’re trying to sweep it under the rug, trying to pretend it’s a one-off.”
Livermore Partners managing director David Neuhauser backed up the remark, stating that the Home Capital crisis is “not an encouraging sign of the health of the Canadian housing market and the country’s broader financial sector.”
Moody’s downgrade of Canada’s big six banks last week seemed to provide evidence for creeping fears that Canada might be on the brink of a major housing crisis.
Bank of Nova Scotia
, Canadian Imperial Bank of Commerce, National Bank
of Canada, Royal Bank
of Canada, Bank of Montreal (BMO), and Toronto-Dominion Bank (TD) had their Moody’s ratings on two key metrics lowered by one notch.
“Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past,” Moody’s senior vice president David Beattie announced.
However, Bank of Canada governor Stephen Poloz noted that at present, no signs of a fiscal “contagion” appear to be spreading from the troubled lender.
"We’d be looking for signs that there are problems with the (financial) system as opposed to preoccupying ourselves with individual institutions,” Poloz said over the weekend.
“The question would be: What caused this? Is it something unique to the institution itself, or is it something in the system? … I think this situation (Home Capital) is pretty clear on that; it’s idiosyncratic.”
No signs of ‘contagion’ from Home Bank so far - BoC chief
Moody’s downgrades Canadian banks amid fears of housing crash