Canadian banks, ranked the soundest by the World Economic Forum, can withstand major economic disruptions because they moved more quickly than their competitors to raise capital buffers, the country’s banking regulator said.
“They could withstand a lot of pain, in part because we’ve kept the capital requirements high,” Julie Dickson said in an interview yesterday from her office in Ottawa. “They are extremely well situated and certainly even stronger than they were going into the crisis in 2008.”
Dickson, head of the Office of the Superintendent of Financial Institutions, said she hasn’t noticed any signs that creditworthiness of the nation’s banks has diminished in recent months as concerns mounted over the European debt crisis and signs of weakness in the U.S. economy grew.
The regulator played a role in keeping the country’s financial system strong, requiring banks to hold a higher level of capital than stipulated by the Basel Committee on Banking Supervision, an arm of the Bank for International Settlements, based in Basel, Switzerland.
The committee has urged global banks to start implementing by January measures known as Basel III that raises capital requirements, and to finish implementing the standards by 2019. Dickson has asked Canadian banks to meet the 2019 goal next year.
The steps help further buffer a banking industry that recorded a fraction of the writedowns taken by lenders and brokers worldwide during the financial crisis.
Canadian banks held four of the top 10 spots in Bloomberg Markets magazine’s annual ranking of the world’s strongest banks, released in May. Canadian Imperial Bank of Commerce placed third, followed by Toronto-Dominion Bank (TD) in fourth, National Bank of Canada (NA) in fifth and Royal Bank of Canada (RY) in sixth.
Dickson said her concern is complacency.
“If you get into a comfort zone, which I describe as complacency, that’s not a good idea,” Dickson said.
The biggest risk to the country’s financial system right now is growing household debt, said Dickson, adding Finance Minister Jim Flaherty’s efforts to tighten mortgage rules will help manage the problem even if it slows growth.
Flaherty implemented changes on July 9 including shortening the maximum length of government-insured mortgages to 25 years from 30 years to quell demand for homes.
The new mortgage rules, coupled with steps taken by the banking regulator to tighten mortgage lending standards, have the same impact in the real estate market as a 1.5 to 2 percentage-point increase in interest rates, said David Tulk, chief Canada macro strategist at TD Securities in Toronto. The changes will reduce growth by 0.1 percentage points this year and 0.2 points in 2013, Tulk said.
The regulator released guidelines on mortgage lending last month that will require lenders to limit the size of loans secured by their homes, take “reasonable steps” to verify borrowers’ incomes and establish standards for acceptable levels of consumer debt. Banks are supposed to implement the new rules by the end of the current fiscal year.
“The way to look at that is short-term pain for long-term gain,” Dickson said, adding she’s more concerned about the impact highly indebted households could have on the economy than bank solvency. “When it comes to the Canadian housing market, the bigger issue there is the impact on individual Canadians. The banks can withstand a lot.”
While there is a lot of experience dealing with the impact of housing market corrections, Europe’s crisis poses more of an unknown for Canada’s banking sector, she said.
“They can withstand a lot of pain but it is very difficult to quantify the kind of stress” that may occur in Europe, Dickson said. “They are extremely well situated to handle any major disruption and certainly this European thing has been there with us for a few years now so people have had a lot of time to think through this.”
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