New rule from banking regulator to make lenders absorb more risk

A proposal sitting at Canada’s banking agency is expected to make banks hesitate at the prospect of lowering mortgage rates in stimulating greater personal borrowing

New rule from banking regulator to make lenders absorb more risk
The Office of the Superintendent of Financial Institutions (OSFI) said on Friday (January 1) that it plans to revise existing mortgage rules that give elbow room for lending banks to ignore the effects of housing slowdowns.
The proposed changes include revisions to the amount of capital that banks and private lenders alike should hold as insurance to guard against delinquent mortgage loans, effectively imposing a tax on lending entities.
Industry observers said that this development would likely compel banks to assume a larger burden in carrying risk in future housing transactions, an assessment that was echoed by the OSFI.
“The purpose of OSFI’s regulatory capital framework is to ensure, as much as possible, that federally regulated financial institutions can absorb severe but plausible losses,” the agency said in its official announcement, as quoted by The Globe and Mail.
In response, many major lenders voiced their support for implementing greater prudence, reduced spending, and larger safety buffers against losses among their ranks, even though the changes are still in the proposal stage and are unlikely to be put in place by 2016.
The six largest banks took assurance in OSFI’s statements that the changes would primarily aim for the lending plans and types that carry the greatest risks.
Currently, Canadian banks must meet a 10-per-cent common equity capital ratio, as tacitly set by the OSFI.