Canada’s banking regulator has released revised capital guidelines for mortgage lenders. Just what every lender loves to hear, right?
Once implemented, federally regulated lenders will have to set aside more capital in certain cases to shield them from a potential market blowup. The new rules kick in November 1 for the big banks.
“Under the proposed revised guideline, the amount of capital required to be held by the institutions is not expected to change significantly,” assured a spokesperson. “These changes aim to ensure that capital requirements continue to reflect underlying risks and developments in the financial industry.”
One interesting change is OSFI’s new “countercyclical buffer” policy. That’s where banks must put aside more capital if the market gets abnormally risky. OSFI says the Bank of Canada’s Financial System Review (FSR) will, in part, help determine if such buffers are necessary. Banks will get 6-12 months’ notice before these countercyclical buffer increases take effect.
“…in Canada, under the current requirements we do not require financial institutions to have a countercyclical buffer,” the spokesperson said. “OSFI does not feel it is necessary to activate a countercyclical buffer based on the principles outlined in the Capital Adequacy Requirements Guideline (CAR).”
In terms of securitization, an issue near and dear to broker lenders, OSFI says, “The revisions to…CAR should not have an impact on mortgage lenders’ securitization abilities.”
As for underwriting, OSFI told CMT, “Through the revised CAR guideline, OSFI is clarifying the conditions under which risk mitigation benefits of mortgage insurance are recognized for regulatory capital purposes.” In other words, if lenders don’t carefully heed insurers’ underwriting and loan requirements, that could “require OSFI to ask financial institutions to implement remedial measures,” which could include coughing up even more capital, suggests the regulator.
OSFI has been keeping busy in the past year. On July 7, it announced it was tightening its “supervisory expectations for mortgage underwriting in light of the evolving housing market.”
It also made clear that it “will be placing a greater emphasis on confirming that controls and risk management practices of mortgage lenders and mortgage insurers are sound and consistent with the principles underpinned by OSFI Guideline B-20: Residential Mortgage Underwriting Practices and Procedures (and, where applicable, OSFI Guideline B-21 – Residential Mortgage Insurance Underwriting Practices and Procedures).”
In April, OSFI introduced a higher floor on capital requirements to “take into account periods where the value of properties pledged as collateral becomes less certain.” Those changes are meant to be “risk sensitive and therefore reflective of regional variation in risk,” it said in December.
What’s the goal of all this? To strengthen the measurement of capital held by the major banks, and better position them to withstand potential losses.
The net effect to mortgage shoppers remains to be seen. Our money is on banks incrementally tightening lending qualifications and slightly increasing mortgage rates to offset their cost of compliance.