Reforms will cause more mortgage securitization, Canadian banks warn

Reforms will cause more mortgage securitization, Canadian banks warn

Proposals on global financial reforms by an international committee are raising concerns among Canadian bankers that lenders will be forced to resort to more mortgage securitization, according to a report in the Financial Post.

The reforms, entitled Basel III, are part of an effort to prevent another credit crisis by setting international regulations. But the Post reports the reform proposals - which specify stricter capital requirements for banks - don't take into account that insured Canadian mortgages are guaranteed by the federal government through CMHC. This could force lenders here to securitize and sell more mortgages as opposed to holding them on their balance sheets.

"Our unique Canadian mortgage market was one of the important reasons why we did so much better than others, and this now may be in peril due to several proposed rules that go over and above the requirements for more capital," said Bank of Nova Scotia chief executive Rick Waugh during the bank's annual meeting. He added that banks, regulators and the Canadian government must "rigorously state our case and protect our interest" to global policymakers.

Finn Poschmann, vice-president of research at the C.D. Howe Institute told the Post that the proposed rules could put Canadian banks in a potentially troubling scenario where they could face slower asset growth on their business or be forced to securitize things that are relatively easy to sell, such as high quality mortgages.

The preliminary new rules by the Basel Committee are scheduled to be released by the end of the year.




  • FJ 2010-04-22 1:59:46 AM
    Big banks in Canada have purposely set themselves up as incredibly complex structures that are virtually impenetrable to scrutiny. Under those layers are literally hundreds of subsidiary companies, each with their own separate legal existence.

    This, of course, has the effect of relieving the banks from an obligation to separately report on the subsidiaries' activities with separate general purpose financial statements.

    In other words, banks partake in a lot of activity that is shielded from public oversight. We don't get to see balance sheets, income statements or cash flow statements for these subsidiary entities. Therefore, we don't know how much of their mortgages are off-balance sheet already, in so-called "special purpose vehicles", which are customarily used to shield the assets from creditors.

    We must wonder therefore whether the present concerns being raised by the banks to attempt to ward off federal regulation, may in fact be completely without any merit. The fact is, nobody knows. The only thing we really do know is that these concerns about the federal regulations are coming from stakeholders (management) who have a vested interest in keeping capital requirements as low as possible.

    Until we see completely open books for the entire web of entities that the banks have set up, shielding a good deal of their activities from scrutiny, we certainly ought not to be taking lobbying efforts such as these (against federal tightening of capital requirements, that is), very seriously.
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