OSFI urges banks to ‘stress-test’ home price crash

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In a memo issued on Tuesday (July 26), the Office of the Superintendent of Financial Institutions (OSFI) required Canada’s “standardized” banks to double-check the impact of a hypothetical 50 per cent drop in residential real estate prices in Greater Vancouver, as well as a 40 per cent decline in Greater Toronto.
 
In addition, the banks were urged to stress-test a 30 per cent drop in home prices for the rest of the country, as reported by Barbara Shecter for the Financial Post.
 
The OSFI memo covers Laurentian and other smaller “deposit-taking institutions”, and they are required to report the results to OSFI by the end of the year. An OSFI official confirmed that the tests do not include HSBC Canada or the country’s six largest banks.
 
Earlier this month, OSFI Superintendent Jeremy Rudin wrote to Canada’s banks about tightening mortgage lending practices with new requirements like income verification.
 
“The risks are getting larger,” Rudin warned. “OSFI wants to see sound mortgage underwriting procedures in place that adapt to the ever-changing circumstances in this area.”
 
Moody’s Investors Service analyst Jason Mercer said that the tests should come as no surprise, “given the recent concerns on housing and household debt.”
 
Mercer, who recently estimated that Canada’s biggest banks and mortgage insurers would lose more than US$17 billion in a “U.S.-style” crash, added that the tests will determine the smaller banks’ resilience against the possible impacts of changes to the CET1 capital level and total ratios as well as authorized leverage ratios.
 
“In theory, a bank could beat the stress [test on capital] by assuming it starts insuring the remainder of its mortgage portfolio,” he said. “The leverage ratio would then pick this up [and could fall below the required threshold even if capital did not].”

Related Stories:
Vancouver, Toronto home price growth outstrips incomes in almost all jobs
Red flags of possible bubble burst now apparent in Vancouver - analyst
 
  • Herry on 2016-07-28 10:00:38 AM

    Canadian housing belongs to Canadians, not communists. Eh harper ?

  • Victor Simone on 2016-07-28 11:10:25 AM

    OSFI is doubling the required stress test with a huge and perfectly impossible decline in prices. Prior to 1991-1992 that saw real estate prices drop by 25%, the average real estate drop in a recession was only 15%.

    Try as they may but the experts trying to predict a disaster just can't understand why consumer confidence remains so high. The only thing that will affect consumer confidence is a huge rate spike.

    Stress tests ABOVE 15% are just not realistic, and in such a scenario the interest rates would need to jump over 2%, imo. Again, not since 1990 have we seen such a rate movement of 2% in a 3 to 6 month period.

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