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].”
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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.