OSFI speech: Part 2

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“Today, I will cover OSFI’s perspectives on the residential mortgage market.”

And so Julie Dickson, OFSI superintendent, kicked off CAAMP’s mortgage forum on Monday. Following is part two of a two-part series, highlighting the salient issues Dickson touched on (part one can be found here).

On following the basics:

The basics are not rocket science. But time and again, it is by ignoring the basics that banks get into trouble. Indeed, while many observers have suggested the global financial crisis was caused by complex products and banks going beyond traditional lending, in fact major problems within traditional lending were a source of the problem — namely, unsound mortgage underwriting.

On stress tests:

Beyond Guideline B-20, a major OSFI focus has been on stress testing and thinking about worst-case scenarios. Many bank regulators around the world are doing the same thing. OSFI asks banks to run stress tests that provide expected results for a number of “what if” questions, including the likely impacts of overvalued markets, or a serious economic decline in Canada, as has occurred in some other countries. OSFI and the Bank of Canada also conduct macro stress tests to explore the possible implications of severe adverse economic scenarios — including episodes of significant housing price corrections. Such tests always cover a range of possibilities, given, as I noted previously, that different opinions always exist on where the market is, and where it is headed.   

On considering the customer more so than the banks:

Consumers must be considered here because, while banks may be able to withstand shocks, consumers may not. Banks have to set aside reserves for unexpected losses and are typically far better situated to deal with shocks than consumers — who may be highly indebted and therefore particularly vulnerable to significant increases in interest rates or unemployment.  

On the future:

Before the summer, OSFI had looked at whether any changes to Guideline B-20 were necessary. We decided that no changes were needed at that time. However, we continue to closely monitor real estate lending, including seeking additional information to better understand what major financial institutions are doing. Any future changes to our guidelines would involve public consultations with CAAMP and other stakeholders.

  • Bryan Jaskolka on 2013-11-29 5:59:03 AM

    I love this post. Unlike many I've read over the past few days about Julie Dickson and this conference she had with brokers and lenders, this one actually TELLS what she said, and what she talked about. Many are just saying that "she brought warnings to the banks," and I thank you for actually delving into the matter and bringing it to those of us that couldn't be there. Thanks!

  • Pat on 2014-07-12 7:36:26 AM

    OSFI is in a state of disarray with inter department bickering between the two layers of Supervision (direct layer and the layers on top in a support group). There is a significant disconnect between a speech by the Minister of Finance Joe Oliver in a speech at a bond conference in London and what OSFI is doing. In this speech, it was mentioned there is/was no housing bubble in Canada. OSFI has one department that reviews new items for housing trends.

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