Canada’s leading banks are petitioning the federal government to reconsider its implementation of a scheme that would make these institutions take on greater mortgage risk.
In a February 28 statement, the Canadian Bankers Association stated that proposed regulatory changes which would compel banks to shoulder a greater share of mortgage defaults via deductibles will be among the most dramatic disturbances to the housing finance sector in half a century.
“This submission has questioned whether a deductible is the most effective way to rebalance risks within the housing finance system,” the CBA said, as quoted by Bloomberg.
“The industry believes that policy alternatives should be considered to achieve the same ends, but are simpler and less disruptive to the existing lending structure.”
Among the CBA’s suggested alternatives would be to permit mortgage insurers to purchase reinsurance, along with increasing Canada’s covered bond limit that would improve private funding of uninsured mortgages—and thus reduce taxpayers’ share of mortgage financing.
Currently, the federal government in conducting public consultations on two strategies—namely, the “first loss” approach (which would hold lenders responsible for a fixed portion of an outstanding loan at the time of default) and the “proportionate-loss” approach (which would mandate banks to pay a percentage of the total loan loss).
“If the federal government decides to proceed with the deductible policy, the banking industry would be interested in providing feedback on these two approaches,” the CBA stated.
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