Any move to help develop the shadow banking sector by the Bank of Canada would be welcome news for the industry, says one mortgage broker.
“Right now there is a little bit of a stranglehold by the big banks,” says Chad Robinson
, president of 360 Degrees Best Interest Mortgages. “There should be some consideration to have the small players – the alternative lenders – enter to provide some pressure on the banks.”
In a recent speech, the Deputy Governor of the Bank of Canada, Timothy Lane, directed his attention to the country’s shadow banking sector, which has dramatically increased in the last five years as a percentage of securitized insured mortgages.
“We are seeing a moderation over the last year in both the buildup of household sector indebtedness and also related imbalances in the housing market,” Lane said to the Toronto audience. “That doesn’t mean to say that the risk has suddenly disappeared and it’s still a risk that we are watching very closely.”
Lane added that shadow banking can provide benefits by offering a wider range of services – which is contrary to the views held around the world, where officials are calling for stricter curbs on these types of non-bank activities.
“The goal is to create incentives so that risk is allocated and managed appropriately, both in banking and in shadow banking activities, making the entire financial system stronger and more resilient,” Lane said.
But Lane should expand his vision for the shadow banking sector, says Robinson, likening the advantages of more players in the mortgage bond market to the government maintaining a diversity of companies in the telecom sector.
“Effectively the big banks are controlling the CMB market,” he told MortgageBrokerNews.ca. “It could be like the telecom sector, with Ottawa providing guidelines for companies that want to sell their wireless spectrum licences.”
The guidelines were unveiled following the government’s decision to block a plan by Telus to buy struggling wireless upstart Mobilicity for $380 million, which would in effect limit competition in the Canadian wireless market.
The growth in securitized insured mortgages over the last five years has been substantial.
For 2007 Q4, it has gone from $157 billion (a 25 per cent share of NHA MBS in shadow banking; 19 per cent share of NHA MBS in total residential mortgage credit; 21 per cent share of total mortgage securitization in total residential mortgage credit) to $379 billion in the fourth quarter of 2012 (60 per cent share of NHA MBS in shadow banking; 33 per cent share of NHA MBS in total residential mortgage credit; 39 per cent share of total mortgage securitization in total residential mortgage credit).
For the big banks, mortgages are big business, says Jane Knop, managing director at First Swiss Group.
“Mortgages are a huge asset on the sheet of banks,” says Knop. “You don’t have a lot of derivative instruments like you do in the U.S.”
Securitization of government-insured mortgages is currently the largest component of the shadow banking sector. It has also become an important component of overall mortgage funding, and now makes up more than one-third (up from one-fifth) of all residential mortgage credit. Issuing debt securities backed by insured mortgages moves mortgage lending away from the traditional banking model where mortgages are funded largely by retail deposits, which represents an increase in the role of shadow banking in mortgage credit.
A major factor in the growth of insured-mortgage securitization is that, compared with other sources, particularly unsecured debt, CMB—and to a lesser extent NHA MBS—represent a very low-cost form of term funding.