Canadian banks and insurers will be required to do more testing on the risks consumer debt places on their balance sheets, said the Office of the Superintendent of Financial Institutions (OSFI) on Monday December 20.
The increased “stress tests” are when banks create hypothetical scenarios, such as a sharp rise in unemployment or significant drop in house prices, to see the potential effects on balance sheets and capital assets. OSFI head Julie Dickson also told the Globe and Mail that it will be asking “many more questions about how banks are monitoring portfolios, including secured loans.”
There is fear that rising interest rates, falling house prices, further job losses or an unexpected economic shock could hurt consumers so that they would be unable to pay back their debts. This in turn could strain the Canadian banks and feed a cycle of dropping consumer spending.